Dividend Stripping, Risk Exposure, and the Effect of the 1984 Tax Reform Act on the Ex-dividend Day Behavior

Theoharry Grammatikos

The Journal of Business, 1989, vol. 62, issue 2, 157-73

Abstract: This article investigates the importance of risk exposure and the effects of the 1984 Tax Reform Act on the ex-dividend day behavior. The tax reform appears to have inhibited short-term trading activities by increasing the risk exposure of incorporated traders. Moreover, stocks for which existing listed options permitted the reduction of risk through hedged dividend-stripping strategies were affected much less from the new tax code than their nonoptionable counterparts. This implies that risk affects investors' dividend yield choice and that the ex-dividend day behavior may be caused, in part, by the existence of risk premia. Copyright 1989 by the University of Chicago.

Date: 1989
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