Price, Volume, and Trading Behavior around the Ex-Dividend Day due to the 1998 Tax Reform: Evidence from Taiwan Stock Market

• Main Authors: Ching-Hwa Lee, 李慶華
• Other Authors: Ming-Chang Cheng
• Format: Others
• Language: en_US
• Published: 2014
• Online Access: http://ndltd.ncl.edu.tw/handle/hrve23

博士 === 國立中正大學 === 企業管理研究所 === 102 === This study examines the market reaction to the tax reform in Taiwan, where a dividend imputation tax system was introduced in 1998. The ‘tax effect’ hypothesis implies that ex-day abnormal returns are positively related to dividend yields, while ‘clientele effect’ hypothesis implies that high-yield (low-yield) stocks are held by low bracket (high bracket) shareholders. This study follows Whitworth and Rao (2010) approach to build an ex-day-return model. The empirical results show that the ex-day abnormal return is a concave downward function of the dividend yield. It means that the existence of the clientele effect will weaken the strength of the positive relationship between ex-day returns and dividend yields. Furthermore, if the clientele effect surpasses the tax effect, we will observe that ex-day returns decrease with dividend yields. It is also found that credit ratios are positively related to the last cum-day abnormal returns and negatively related to ex-day abnormal returns, indicating that there is credit-motivated trading around the ex-days. In addition, this study investigates buy-sell imbalances around the ex-dividend day, and the empirical results show that trading activities are not entirely correlated with investor tax status. Margin traders and short sellers engage in arbitrage by selling more stocks for those with high abnormal returns cum- and ex-dividend, respectively. Additionally, Risk and transaction costs deter traders from trading around the ex-dividend day.