Taxes, order imbalance and abnormal returns around the ex-dividend day

Andrew B. Ainsworth, Kingsley Y.L. Fong, David R. Gallagher, Graham Partington

Research output: Contribution to journalArticleResearchpeer-review

Abstract

A costly arbitrage model, developed for the Australian imputation tax system, shows that stocks paying dividends with a tax credit are likely targets for exdividend arbitrage. We show that order imbalance, based on the direct observation of buyer and seller initiated trades, is a key factor in price movements around the ex-dividend day. Buying pressure before the ex-dividend day aimed at capturing the dividend and tax credit leads to an increase in prices that subsequently reverse in the ex-dividend period. This effect is concentrated in those stocks distributing a tax credit with their dividend payments. The price pressure resulting from order imbalance is substantially higher around the ex-dividend day relative to the effect observed outside this period. Our results reject the model of Frank and Jagannathan (1998) that bid-ask bounce is responsible for the ex-day premium and provide support for explanations based on taxes, transaction costs, and incomplete price adjustment on the ex-day.

LanguageEnglish
Pages379-409
Number of pages31
JournalInternational Review of Finance
Volume18
Issue number3
DOIs
Publication statusPublished - Sep 2018

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Abnormal returns
Ex-dividend day
Tax
Tax credits
Order imbalance
Dividends
Arbitrage
Payment
Transaction costs
Seller
Price adjustment
Ex-dividend
Imputation
Tax system
Premium
Buyers
Factors
Price pressure
Bid
Stock dividends

Cite this

Ainsworth, A. B., Fong, K. Y. L., Gallagher, D. R., & Partington, G. (2018). Taxes, order imbalance and abnormal returns around the ex-dividend day. International Review of Finance, 18(3), 379-409. https://doi.org/10.1111/irfi.12155
Ainsworth, Andrew B. ; Fong, Kingsley Y.L. ; Gallagher, David R. ; Partington, Graham. / Taxes, order imbalance and abnormal returns around the ex-dividend day. In: International Review of Finance. 2018 ; Vol. 18, No. 3. pp. 379-409.
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Ainsworth, AB, Fong, KYL, Gallagher, DR & Partington, G 2018, 'Taxes, order imbalance and abnormal returns around the ex-dividend day', International Review of Finance, vol. 18, no. 3, pp. 379-409. https://doi.org/10.1111/irfi.12155

Taxes, order imbalance and abnormal returns around the ex-dividend day. / Ainsworth, Andrew B.; Fong, Kingsley Y.L.; Gallagher, David R.; Partington, Graham.

In: International Review of Finance, Vol. 18, No. 3, 09.2018, p. 379-409.

Research output: Contribution to journalArticleResearchpeer-review

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