Ex-dividend prices and investor trades: Evidence from Taiwan

Based upon an examination of 987 ex-dividend events that took place on the Taiwan Stock Exchange between January 1992 and December 2006, we find that differential taxes are an important factor affecting share prices and the behavior of investors around the ex-dividend day. Ex-day price drop ratio increases with the average investor's preference for dividend relative to capital gains. Excess volume around the ex-dividend day is positively correlated with the degree of tax heterogeneity and the gains from dividend-capturing activities, and is negatively associated with arbitrage risk and transaction costs. We also find that high tax-bracket investors sell shares cum-dividend, subsequently reversing to buy shares on the ex-dividend day, whereas low tax-bracket individual investors, proprietary traders and corporate shareholders trade in the opposite direction. Overall, our results provide support for the dynamic dividend clientele hypothesis.

► Differential taxes are an important factor affecting share prices and trading volume around the ex-dividend day.
► Ex-day price drop ratio increases with the average investor’s preference for dividend.
► Excess volume around the ex-dividend day is positively correlated with the degree of tax heterogeneity.
► Investors with tax disadvantages trade their dividends with those investors who have tax advantages.