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

Authors

Yi Zhang, University of Nebraska Lincoln
Kathleen A. Farrell, University of Nebraska LincolnFollow
Todd A. Brown, Stephen F. Austin State UniversityFollow

Date of this Version

2008

Comments

Published in National Tax Journal Vol. LXI, No. 1 (March 2008). Copyright 2008 National Tax Association.

Abstract

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.