New Evidence on the Behavior of Canadian Stock Prices in the Days Surrounding the Ex-Dividend Day

By Athanassakos, George; Fowler, David | Quarterly Journal of Business and Economics, Autumn 1993 | Go to article overview

New Evidence on the Behavior of Canadian Stock Prices in the Days Surrounding the Ex-Dividend Day


Athanassakos, George, Fowler, David, Quarterly Journal of Business and Economics


INTRODUCTION

Ever since Elton and Gruber (1970) used the ratio of the ex-dividend day price change to the dividend per share to infer the typical investor's marginal tax rate and advanced the dividend (tax) clientele hypothesis there has been considerable debate about the interpretation of their results.(1) Miller and Scholes (1982) and Kalay (1982) have challenged Elton and Gruber's dividend clientele hypothesis. They argue that the Elton and Gruber analysis ignores the short-term trades by members of the exchange and by tax-exempt investors whose activities tend to eliminate abnormal returns around the ex-dividend day. The findings of Lakonishok and Vermaelen (1986) support Kalay's short-term trading hypothesis in that trading volume increases around the ex-dividend day, particularly in the period following the introduction of negotiable commissions in 1975. Karpoff and Walkling (1988) provide further support for the short-term trading hypothesis. Their study of stock returns on the ex-dividend day shows that short-term traders are the marginal investors in high yield stocks on the NYSE, particularly since the advent of negotiated commissions. Short-term trading, however, is not evident in low yield stocks at any time.

Foster and Oldfield (1986), on the other hand, find that transactions costs are large enough to limit the ability of short-term traders to effect particular price adjustments. Heath and Jarrow (1988) demonstrate that the ex-dividend day stock price may differ arbitrarily from the dividend for each individual stock; therefore, short-term traders cannot generate riskless arbitrage profits. As a result, ex-dividend stock returns must include a risk premium. Their argument does not rely on transactions costs, but on risk considerations.

Lakonishok and Vermaelen (1983) and Booth and Johnston (1984) have performed similar studies using Canadian data. Lakonishok and Vermaelen examine the ex-dividend day behavior of Canadian stock prices around the introduction of a tax reform in 1972 and conclude that the Elton and Gruber tax clientele

hypothesis is invalid. Booth and Johnston, on the other hand, investigate the ex-dividend day behavior using the Elton and Gruber methodology over four distinct tax regimes between 1970 and 1980. They find that the marginal tax rate implied by the ratio of the ex-dividend day price change to the dividend is greater than the maximum marginal tax rate payable. The only firm conclusion they are able to reach is that the ex-dividend day price changes for stocks interlisted on Canadian and U.S. exchanges are determined by U.S. rather than by Canadian investors.

Green (1980) extends the Elton and Gruber analysis by introducing costs of delaying or accelerating a transaction. His work sets the theoretical foundation for the development of the model of delay and acceleration of trade in response to different tax rates. Grundy (1985) extends and tests Green's model by examining the extent to which investors accelerate or delay trades in response to the payment of the dividend. He argues that a tax-induced incentive to either delay or accelerate trades would result in specific patterns of abnormal returns around the ex-dividend day. He shows that when capital gains are taxed on realization rather than accrual, the stock price behavior is affected not only on the ex-dividend day, but also during a few days around it. His empirical results lead him to conclude that the evidence is consistent with the predictions of the model of delay and acceleration of trade and the existence of dividend clienteles.

This study tests the clienteles and short-term traders hypotheses employing a modified version of the model of delay and acceleration of trade to Canadian data over different tax and transactions cost regimes from 1970 to 1984. There were significant differences between the structure of tax rates and transactions costs in Canada and in the U.S. over the period studied. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

New Evidence on the Behavior of Canadian Stock Prices in the Days Surrounding the Ex-Dividend Day
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.