Taxes, order imbalance and abnormal returns around the ex-dividend day

Andrew B. Ainsworth*, Kingsley Y.L. Fong, David R. Gallagher, Graham Partington

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)
29 Downloads (Pure)


A costly arbitrage model, developed for the Australian imputation tax system, shows that stocks paying dividends with a tax credit are likely targets for exdividend arbitrage. We show that order imbalance, based on the direct observation of buyer and seller initiated trades, is a key factor in price movements around the ex-dividend day. Buying pressure before the ex-dividend day aimed at capturing the dividend and tax credit leads to an increase in prices that subsequently reverse in the ex-dividend period. This effect is concentrated in those stocks distributing a tax credit with their dividend payments. The price pressure resulting from order imbalance is substantially higher around the ex-dividend day relative to the effect observed outside this period. Our results reject the model of Frank and Jagannathan (1998) that bid-ask bounce is responsible for the ex-day premium and provide support for explanations based on taxes, transaction costs, and incomplete price adjustment on the ex-day.

Original languageEnglish
Pages (from-to)379-409
Number of pages31
JournalInternational Review of Finance
Issue number3
Publication statusPublished - 2018
Externally publishedYes


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