Ex–Dividend Day Price and Volume: The Case of 2003 Dividend Tax Cut

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We examine the impact of the 2003 dividend tax cut, which removes the differential taxation between dividends and capital gains for individual investors, on the ex–dividend day price and trading volume. We find the ex–dividend day price and volume are affected by taxes, risk, and transaction costs. The ex–dividend day price drop ratio (excess return) increases (decreases) and dividend clienteles weaken after the tax cut. Ex–dividend day abnormal volume among high dividend yield stocks decreases after the tax cut consistent with a diminished motivation for tax–induced trading. Our results suggest that individual investors have a measurable effect on the ex–dividend day price and trading volume.


Originally published in the National Tax Journal 61(1) (March 2008): 105-127. The article is available in full text from the UNL Digital Commons



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