Ticks and Tax: The Effects of Price Discreteness and Taxation on Ex-Dividend Day Returns

We investigate changes in the relation between dividend yield and exdividend day stock returns across four regimes, defined by two reductions in share price discreteness and two changes in differential tax rates on dividend versus longterm capital gain income of individual investors. Our research de...

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Bibliographic Details
Published in:The Journal of the American Taxation Association 2006-10, Vol.28 (2), p.23-46
Main Authors: Cloyd, C. Bryan, Li, Oliver Zhen, Weaver, Connie D.
Format: Article
Language:English
Subjects:
Abnormal returns
Arbitrage
Capital gains
Decimals
Dividends
Hypotheses
Investments
Rates of return
Research design
Stock exchanges
Stock prices
Stockholders
Studies
Tax rates
Taxation
Taxes
Yield
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Summary:We investigate changes in the relation between dividend yield and exdividend day stock returns across four regimes, defined by two reductions in share price discreteness and two changes in differential tax rates on dividend versus longterm capital gain income of individual investors. Our research design enables us to examine the effect of changing price discreteness (1/16 to decimals) in early 2001 while holding tax rates constant, as well as the effect of changing tax rates in May 2003, while holding price discreteness constant. Changes in the relation between dividend yield and ex-dividend day abnormal returns across these regimes suggest that differential taxation is primarily responsible for the relation between dividend yield and ex-dividend day returns, although we find weak evidence that price discreteness also affects this relation.
ISSN:0198-9073
1558-8017
DOI:10.2308/jata.2006.28.2.23