Ex‐Day Behavior: Tax or Short‐Term Trading Effects

  • Author(s): M. AMEZIANE LASFER
  • Published: Apr 30, 2012
  • Pages: 875-897
  • DOI: 10.1111/j.1540-6261.1995.tb04040.x


This study examines the behavior of share prices around the ex‐dividend dates before and after the introduction of the 1988 Income and Corporation Taxes Act that reduced substantially the tax differential between dividends and capital gains in the United Kingdom. We find that, in the pre‐1988 period when the differential taxation of dividends and capital gains is high, ex‐day returns are positive and significant. In contrast, in the post‐1988 period, ex‐day returns are, in most cases, negative and insignificant. Further analysis reveals that, while ex‐day returns are significantly related to dividend yield and to the length of the settlement period, they are not affected by the commonly used measures of transaction costs, such as the bid‐ask spread and trading volume, or by the day of week, month of the year, type of dividend distribution, or number of days to the actual receipt of the cash dividend. We conclude that taxation affects significantly ex‐day share prices in the United Kingdom.

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