Investigation of the costly-arbitrage model of price formation around the ex-dividend day in Norway

Qinglei Dai and Kristian Rydqvist

Journal of Empirical Finance, 2009, vol. 16, issue 4, pages 582-596

Abstract: We estimate the costly-arbitrage model of Boyd and Jagannathan [Boyd, John, and Jagannathan, Ravi, 1994, Ex-Dividend Price Behavior of Common Stocks, Review of Financial Studies 7, 711-741.] using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We conclude that uncertainty about the cash flows prevents arbitrage.

Keywords: Ex-dividend; day; Withholding; tax; Imputation-tax; credit; Costly-arbitrage; model; Legal; risk; Estimation; risk (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:empfin:v:16:y:2009:i:4:p:582-596

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