Investors' Heterogeneity, Prices, and Volume around the Ex-Dividend Day

Roni Michaely and Jean-Luc Vila

Journal of Financial and Quantitative Analysis, 1995, vol. 30, issue 2, 171-198

Abstract: This paper analyzes the relationship between tax heterogeneity and the behavior of stock prices and trading volume around the ex-dividend day within an equilibrium framework. We conclude that, even in a world without transaction costs, the price drop on the ex-day need not be equal to the dividend amount. Our model accounts for the higher market trading volume around the ex-day, and shows this to be a function of tax heterogeneity among traders. We show that the volume of trade around the ex-day contains information about investors' tax preferences above and beyond the information contained in the ex-day price alone. Consistent with the model's predictions, our empirical analysis reveals that as the risk associated with the ex-dividend day increases, or tax heterogeneity decreases, trading volume decreases.

Date: 1995
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