Ex‐Dividend Day Stock Price Behavior: The Case of the 1986 Tax Reform Act

Abstract

This paper analyzes the behavior of stock prices around ex‐dividend days after the implementation of the 1986 Tax Reform Act that dramatically reduced the difference between the tax treatment of realized long‐term capital gains and dividend income in 1987 and completely eliminated the differential in 1988. We show that this tax change had no effect on the ex‐dividend stock price behavior, which is consistent with the hypothesis that long‐term individual investors have no significant effect on ex‐day stock prices during this time period. The results indicate that the activity of short‐term traders and corporate traders dominates the price determination on the ex‐day. 1991 The American Finance Association