Efthymiou, Vassilis A. and Leledakis, George N. (2011): The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks.
Download (411Kb) | Preview
We empirically test whether the disposition effect, the inclination of investors to sell winning stocks more readily than losing stocks, has an asymmetrical impact on the price adjustment on the ex-dividend day. Using aggregate market data for a sample of ordinary taxable dividends of common stocks listed in NYSE and AMEX during the 2001-2008 period, we employ the capital gains overhang proxy to measure accrued gains or losses for individual stocks. We find that stocks with accrued gains have a higher market adjusted price drop than stocks with accrued losses on the ex-dividend day. Moreover, there is a significantly positive relationship between the ex-day price drop and the capital gains overhang. Both results are attributed to the disposition effect since active (limited) selling by holders of winning (losing) stocks will most likely speed up (restrain) the downward price adjustment on the ex-dividend day. Our results remain robust to various ex-day price drop measures and different investor holding period lengths assumed.
|Item Type:||MPRA Paper|
|Original Title:||The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks|
|Keywords:||disposition effect; ex-dividend day; capital gains overhang|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G3 - Corporate Finance and Governance > G35 - Payout Policy
|Depositing User:||Vassilis A. Efthymiou|
|Date Deposited:||12. Feb 2011 19:03|
|Last Modified:||13. Feb 2013 10:16|
Ajinkya, B.B., Jain, P.C., 1989. The behavior of daily stock market volume. Journal of Accounting and Economics 11, 331–360.
Bali, R., Hite, G., 1998. Ex-dividend day stock price behavior: Price discreteness or tax-induced clientele? Journal of Financial Economics 47, 127–159.
Barber, B.M., Lee, Y.T., Liu, Y.J., Odean, T., 2007. Is the aggregate investor reluctant to realise losses? Evidence from Taiwan. European Financial Management 13, 423–447.
Barberis, N., Xiong, W., 2009. What drives the disposition effect? An analysis of a long-standing preference-based explanation. Journal of Finance 64, 751–884.
Barclay, M.J., 1987. Dividends, taxes, and common stock prices. The ex-dividend day behavior of common stock prices before the income tax. Journal of Financial Economics 19, 31–44.
Bell, L., Jenkinson, T., 2002. New evidence of the impact of dividend taxation and on the identity of the marginal investor. Journal of Finance 57, 1321–1345.
Boyd, J., Jagannathan, R., 1994. Ex-dividend price behavior of common stocks. Review of Financial Studies 7, 711–741.
Campbell, C.J., Wasley, C.E., 1996. Measuring abnormal daily trading volume for samples of NYSE/ASE and NASDAQ securities using parametric and nonparametric test statistics. Review of Quantitative Finance and Accounting 6, 309–326.
Coval, J.D., Shumway, T., 2005. Do behavioral biases affect prices? Journal of Finance 60, 1–34.
D’Agostino, R.B., Belanger, A.J., D’Agostino, R.B.Jr., 1990. A suggestion for using powerful and informative tests of normality. American Statistician 44, 316–321.
Dhar, R., Zhu, N., 2006. Up close and personal: Investor sophistication and the disposition effect. Management Science 52, 726–740.
Elton, E.J., Gruber, M.J., 1970. Marginal stockholders’ tax rates and the clientele effect. Review of Economics and Statistics 52, 68–74.
Elton, E.J., Gruber, M.J., Blake, C.R., 2005. Marginal stockholder tax effects and ex-dividend-day price behavior: Evidence from taxable versus nontaxable closed-end funds. Review of Economics and Statistics 87, 579–586.
Elton, E.J., Gruber, M.J., Rentzler, J., 1984. The ex-dividend day behavior of stock prices: A re-examination of the clientele effect: A comment. Journal of Finance 39, 551–556.
Fama, E.F., French, K.R., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3–56.
Fama, E.F., MacBeth, J.D., 1973. Risk, return, and equilibrium: Empirical tests. Journal of Political Economy 81, 607–636.
Frank, M., Jagannathan, R., 1998. Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes. Journal of Financial Economics 47, 161–188.
Frazzini, A., 2006. The disposition effect and underreaction to news. Journal of Finance 61, 2017–2046.
Frino, A., Johnstone, D., Zheng, H., 2004. The propensity for local traders in futures markets to ride losses: Evidence of irrational or rational behavior? Journal of Banking and Finance 28, 353–372.
Garvey, R., Murphy, A., 2004. Are professional traders too slow to realize their losses? Financial Analysts Journal 60, 35–43.
Graham, J.R., Kumar, A., 2006. Do dividend clienteles exist? Evidence on dividend preferences of retail investors. Journal of Finance 61, 1305–1336.
Graham, J.R., Michaely, R., Roberts, M.R., 2003. Do price discreteness and transaction costs affect stock returns? Comparing ex-dividend pricing before and after decimalization. Journal of Finance 58, 2611–2635.
Green, R.C., Rydqvist, K., 1999. Ex-day behavior with dividend preference and limitations to short-term arbitrage: The case of Swedish lottery bonds. Journal of Financial Economics 53, 145–187.
Grinblatt, M., Han, B., 2005. Prospect theory, mental accounting and momentum. Journal of Financial Economics 78, 311–339.
Grinblatt, M., Keloharju, M., 2001. What makes investors trade? Journal of Finance 56, 589–616.
Harris, L., 1988. Predicting contemporary volume with historic volume at differential price levels: Evidence supporting the disposition effect: Discussion. Journal of Finance 43, 698–699.
Jakob, K., Ma, T., 2004. Tick size, NYSE rule 118, and ex-dividend day stock price behavior. Journal of Financial Economics 72, 605–625.
Jin, L., 2006. Capital gains tax overhang and price pressure. Journal of Finance 61, 1399–1431.
Kadapakkam, R.P., 2000. Reduction of constraints on arbitrage trading and market efficieny: An examination of ex-day returns in Hong Kong after introduction of electronic settlement. Journal of Finance 55, 2841–2861.
Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263–291.
Kalay, A., 1982. The ex-dividend day behavior of stock prices: A re-examination of the clientele effect. Journal of Finance 37, 1059–1070.
Kalay, A., 1984. The ex-dividend day behavior of stock prices: A re-examination of the clientele effect: A reply. Journal of Finance 39, 557–561.
Kalay, A., Subrahmanyam, M.G., 1984. The ex-dividend day behavior of option prices. Journal of Business 57, 113–128.
Koski, J.L., 1996. A microstructure analysis of ex-dividend stock price behavior before and after the 1984 and 1986 tax reform acts. Journal of Business 69, 313–338.
Lakonishok, J., Smidt, S., 1986. Volume for winners and losers: Taxation and other motives for stock trading. Journal of Finance 41, 951–974.
Lamdin, D.J., Hiemstra, C., 1993. Ex–dividend day share price behavior: Effects of the Tax reform Act of 1986. Review of Economics and Statistics 75, 778–783.
Lasfer, M.A., 1995. Ex–day behavior–tax or short–term trading effects. Journal of Finance 50, 875–897.
Locke, P.R., Mann, S.C., 2005. Professional trader discipline and trade disposition. Journal of Financial Economics 76, 401–444.
Locke, P.R., Onayev, Z., 2005. Trade duration: Information and trade disposition. Financial Review 40, 113–129.
Lynch, A.W., Mendenhall, R.R., 1997. New Evidence on stock price effects associated with changes in the S&P 500 Index. Journal of Business 70, 351–383.
Michaely, R., Vila, J-L., 1995. Investors’ heterogeneity, prices, and volume around the ex-dividend day. Journal of Financial and Quantitative Analysis 30, 171–198.
Miller, M., Modigliani, F., 1961. Dividend policy, growth, and the valuation of shares. Journal of Business 34, 411–433.
Milonas, T.N., Travlos, G.N., Xiao, Z.J., Tan, C., 2006. The ex-dividend day stock price behavior in the Chinese stock market. Pacific-Basin Finance Journal 14, 155–174.
Naranjo, A., Nimalendran, M., Ryngaert, M., 2000. Time variation of ex-dividend day stock returns and corporate dividend capture: A reexamination. Journal of Finance 55, 2357–2372.
Odean, T., 1998. Are investors reluctant to realize losses? Journal of Finance 53, 1775–1797.
Porterba, J., Summers, L., 1984. New evidence that taxes affect the valuation of dividends. Journal of Finance 39, 1397–1415.
Rantapuska, E., 2008. Ex-dividend day trading: Who, how, and why? Evidence from the Finnish market. Journal of Financial Economics 88, 355–374.
Robin, A.J., 1991. The impact of the 1986 tax reform act on ex-dividend day returns. Financial Management 20, 60–70.
Roll, R., 1997. An analytic valuation formula for unprotected American call options on stocks with known dividends. Journal of Financial Economics 5, 251–258.
Shapira, Z., Venezia, I., 2001. Patterns of behavior of professionally managed and independent investors. Journal of Banking and Finance 25, 1573–1587.
Shefrin, H., Statman, M., 1985. The disposition to sell winners too early and ride losers too long: Theory and evidence. Journal of Finance 40, 777–790.
Thaler, R., 1985. Mental accounting and consumer choice. Marketing Science 4, 199–214.
Williams, R.L., 2000. A note on robust variance estimation for cluster-correlated data. Biometrics 56, 645–646.
White, H., 1980. A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48, 817–838.
Zhang, Y., Farrell, K.A., Brown, T.A., 2008. Ex-dividend day price and volume: The case of 2003 dividend tax cut. National Tax Journal 61, 105–125.
Available Versions of this Item
- The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks. (deposited 12. Feb 2011 19:03) [Currently Displayed]