Taxes, Order Imbalance and Abnormal Returns around the ex-Dividend day



Publication Details

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.


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

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