Ex-dividend pricing, taxes and arbitrage opportunities: the case of the Portuguese stock exchange

Jorge Farinha () and Miguel Sôro ()
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Jorge Farinha: CETE, Faculdade de Economia, Universidade do Porto
Miguel Sôro: Banco Espírito Santo, Porto

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: This paper examines the ex-dividend stock price behaviour in the Portuguese Stock Exchange between 1993 and 2002, a unique period characterized by a richness of different investor tax statuses and several tax changes. After classifying investors according to their tax profile and corresponding dividend tax discrimination factorss, we find that the pursuit of a short-term trading strategy around the ex-dividend day does not yield significant abnormal returns after tax and bid-ask costs. These results are in accordance with the inexistence of arbitrage opportunities even when extreme tax situations are considered under different dividend yield scenarios. It is also shown that the observed ex-dividend price reduction is consistent with a tax explanation and in disagreement with market microstructure arguments. Further tests indicate that the price change is not significantly different from the expected theoretical price reduction for a marginal investor which we identified most likely as a long-term shareholder in high-tax brackets. Finally, our results only provide a weak support for the clientele hypothesis.

Keywords: ex-dividend pricing; arbitrage; taxes; international financial markets; market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2005-12
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fin and nep-fmk
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