Dividend drop ratios and tax theory: An intraday analysis under different tax and price quoting regimes

We calculate dividend drop ratios over different periods with changing quotation and taxation frameworks to assess the validity of competing explanations. Using intraday prices adjusted for non-trading, we provide a more accurate representation of price changes due to ex-dividend day effects than those depicted in previous literature. Intraday estimates for dividend drop ratios are consistently higher than those calculated with beginning or end of day prices. Further findings indicate that stocks trading ex-dividend, on average, underperform the market over the following month. We attribute this phenomenon to dividend capture trading by tax advantaged and tax indifferent market participants.