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Investors' Heterogeneity, Prices, and Volume around the Ex-Dividend Day

Published online by Cambridge University Press:  06 April 2009

Roni Michaely  and
Jean-Luc Vila
Roni Michaely
Affiliation:
Johnson School of Management, Cornell University, Ithaca, NY 14853
Jean-Luc Vila
Affiliation:
Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02139
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Abstract

This paper analyzes the relationship between tax heterogeneity and the behavior of stock prices and trading volume around the ex-dividend day within an equilibrium framework. We conclude that, even in a world without transaction costs, the price drop on the ex-day need not be equal to the dividend amount. Our model accounts for the higher market trading volume around the ex-day, and shows this to be a function of tax heterogeneity among traders. We show that the volume of trade around the ex-day contains information about investors' tax preferences above and beyond the information contained in the ex-day price alone. Consistent with the model's predictions, our empirical analysis reveals that as the risk associated with the ex-dividend day increases, or tax heterogeneity decreases, trading volume decreases.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 2 , June 1995 , pp. 171 - 198
Copyright
Copyright © School of Business Administration, University of Washington 1995

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