Investors’ Heterogeneity, Prices, and Volume Around the Ex-Dividend Day

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. © 1995, School of Business Administration, University of Washington. All rights reserved.