MARGINAL STOCKHOLDER TAX EFFECTS AND EX-DIVIDEND-DAY PRICE BEHAVIOR: EVIDENCE FROM TAXABLE VERSUS NONTAXABLE CLOSED-END FUNDS

Edwin J. Elton, Martin J. Gruber and Christopher R. Blake

Chapter 2 in Investments and Portfolio Performance, 2010, pp 11-18 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractAlmost all research on the movement of stock prices on ex-dividend days has found that prices decline by less than the dividend. Though this is consistent with tax effects, several papers have argued that this phenomenon could be caused by market microstructure effects. In this paper we make use of a natural experiment that provides support for the tax explanations of ex-dividend behavior. Some closed-end funds have taxable, and some have nontaxable, dividend distributions. Both types are subject to taxes on capital gains. The implication of this for ex-dividend-day price behavior is very different between these two types of funds if taxes matter. This paper demonstrates that the direction of ex-dividend-day price behavior is consistent with a tax explanation and that ex-dividend-day price behavior changes, as theory would suggest, with changes in the tax law.

Keywords: Investments; Portfolio Management; Bond Pricing; Pension Funds; Estimating Taxes (search for similar items in EconPapers)
Date: 2010
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