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.

Jeff Hubbard, Roni Michaely, Do Investors Ignore Dividend Taxation? A Reexamination of the Citizens Utilities Case, The Journal of Financial and Quantitative Analysis, Vol. 32, No. 1 (Mar., 1997), pp. 117-135

We decompose the decrease (1970s–2000) and subsequent recovery (2000–2018) in the fraction of dividend-paying firms. Changes in firm characteristics and proclivity to pay (probability of paying dividends conditional on characteristics) each drive half of the dividend disappearance. A higher proclivity drives 82% of the dividend reappearance. The remaining 18% is driven by a single characteristic: reduced earnings volatility. Changing characteristics are associated with low-profitability, high-earnings-volatility firms. Changing proclivity is associated with stable, profitable firms. Rather than dividend initiations or omissions, newly listed and delisted firms drive trends. Finally, the magnitude and duration of disappearing total payout is substantially smaller than that of dividends, indicating some substitution between dividends and repurchases.

We examine the dynamic relation between return and volume of individual stocks. Using a simple model in which investors trade to share risk or speculate on private information, we show that returns generated by risk-sharing trades tend to reverse themselves, while returns generated by speculative trades tend to continue themselves. We test this theoretical prediction by analyzing the relation between daily volume and first-order return autocorrelation for individual stocks listed on the NYSE and AMEX. We find that the cross-sectional variation in the relation between volume and return autocorrelation is related to the extent of informed trading in a manner consistent with the theoretical prediction.

Since the late 1990s, over 75% of US industries have experienced an increase in concentration levels. We find that firms in industries with the largest increases in product market concentration show higher profit margins and more profitable mergers and acquisitions deals. At the same time, we find no evidence for a significant increase in operational efficiency. Taken together, our results suggest that market power is becoming an important source of value. These findings are robust to the inclusion of (i) private firms; (ii) factors accounting for foreign competition; and (iii) the use of alternative measures of concentration. We also show that the higher profit margins associated with an increase in concentration are reflected in higher returns to shareholders. Overall, our results suggest that the US product markets have undergone a shift that has potentially weakened competition across the majority of industries.

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. The authors investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years -1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year -1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat 'permanent'. In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.

This paper analyzes the relationship between tax heterogeneity and the behavior of stock prices and 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.The model allows us to account for higher market trading volume around the ex-day.The market trading volume is shown to be a positive 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.constant), the abnormal volume of trade significantiy decreases.Using the period around the 1986 TRA, we are also able to show that a change in the degree of tax heterogeneity affects both prices and volume around the ex-dividend day.Our analysis shows that unless a perfect tax clientele exists, it is not possible to infer tax rates from price alone.[By a perfect tax clientele we mean that each tax group hold different securities, and all trading is intra-group trading.See Miller and Modigliani (1961) and Elton and Gruber (1970)].However, the crosssectional distribution of tax rates can be inferred by using both price and volume data.This point can be illustrated using the following stylized example.Assume that there are three groups of traders in the marketplace with a marginal rate of substitution between dividends and capital gains income of 0.75, 1.0, and 1.25, respectively.Assume further that the average price drop relative to the dividend amount is 1.0.Using the standard analysis, we may conclude that the second group dominates the ex-dividend day price determination.However, this may not be the case.For example, suppose that 50% of the traders are from the first group, 50%

[Portfolio diversification of firms’ controlling owners influences their firms’ capital investment. Empirically, the effect of owners’ portfolio diversification on their firms’ investment levels is positive for publicly traded firms and tends to be negative for privately held ones. These findings are consistent with predictions of a model in which a risk-averse investor simultaneously chooses her portfolio structure, and both the level and riskiness of capital investment of the firm she controls, and in which the firm can be potentially constrained in its capital investment choices. Overall, our results indicate that owners’ portfolio underdiversification and firms’ financial constraints can affect firms’ resource allocation.]

We compare the dividend policies of publicly and privately held firms in order to help identify the forces shaping corporate dividends, and shed light on the behavior of privately held companies. We show that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets plays a central role in the propensity of firms to smooth dividends over time. Public firms pay relatively higher dividends that tend to be more sensitive to changes in investment opportunities than otherwise similar private firms. Ultimately, ownership structure and incentives play key roles in shaping dividend policies.

We investigate the effect of asymmetric information on prices and liquidity by analyzing trades, quotes, spreads, and depths. Information content should increase with trade size and the information asymmetry of the trading period. Results show that price and liquidity effects are significantly associated with information content as measured by both trade size and timing relative to information events. Results are stronger for purchases than sales. Quoted prices are better measures of information effects than transaction prices, because they control for bid-ask bounce. Finally, trades that a priori contain no information have no impact on prices and liquidity, despite their large size.