Dividend Drop-Off Research

A number of papers provide evidence that share price drops by less than the amount of dividend on the ex-dividend date (Poterba & Summers, 1984; Grammatikos, 1989; Lamdin & Hiemstra, 1993; and Brown & Walter, 1986). However, the literature provides inconclusive evidence on the factors that might explain this phenomenon. For example, Elton & Gruber (1970) argue that the result is evidence of a tax effect. They argue that the dividend is valued less than its face value as the consequence of the higher tax rate on dividends than on capital gains.

On the other hand, Miller & Modigliani (1961) provide theoretical evidence that investors would be indifferent to receiving a return in the form of dividends or capital gains. In support, Campbell & Beranek (1955) and Durand & May (1960) find that the share price drops by less than the dividend amount, but it is not significantly different. Further, Kalay (1982) argues that the share price drop-off on the ex-dividend date is related to transaction costs rather than a tax effect. Examining major changes in tax law, which should increase the preference for dividends over capital gains, Brown and Clarke (1993) find that the drop-off on the ex-dividend date increases, contradictory to their expectation.

In search of an explanation, Frank & Jagannathan (1998) use a sample from the Hong Kong capital market where neither dividends nor capital gains are taxed. They find that the share price drops less than the amount of the dividend on the ex-dividend date. They argue that tick size plays an important role in that result. However, Cloyd, Zhen Li, & Weaver (2006) find that tick size has only a second-order effect on that relationship through its effect on transaction costs. Several other papers considering different types of equity investment (Feuerherdt, Gray, & Hall 2010), types of distribution (Poterba ,1986), and methodologies (Cannavan, Finn, & Gray, 2004 and Harris, Hubbard, & Kemsley, 2001) also provide inconclusive results.  Therefore is study aims to close the gap by providing factors that possibly explain the ex-dividend date share price issue.


  • Brown, P., & Clarke, A. (1993). The Ex-Dividend Day Behaviour of Australian Share Prices Before and After Dividend Imputation. Australian Journal of Management (University of New South Wales), 18(1), 1.
  • Brown, P., & Walter, T. (1986). Ex-Dividend Day Behaviour of Australian Share Prices. Australian Journal of Management (University of New South Wales), 11(2), 139.
  • Campbell, J. A., & Beranek, W. (1955). Stock Price Behavior on Ex-Dividend Dates. Journal of Finance, 10(4), 425–429.
  • Cannavan, D., Finn, F., & Gray, S. (2004). The value of dividend imputation tax credits in Australia. Journal of Financial Economics, 73(1), 167–197.
  • Cloyd, C. B., Zhen Li, O., & Weaver, C. D. (2006). Ticks and Tax: The Effects of Price Discreteness and Taxation on Ex-Dividend Day Returns. Journal of the American Taxation Association, 28(2), 23–46.
  • Durand, D., & May, A. M. (1960). The Ex-Dividend Behavior of American Telephone and Telegraph Stock. Journal of Finance, 15(1), 19–31.
  • Elton, E. J., & Gruber, M. J. (1970). Marginal Stockholder Tax Rates and the Clientele Effect. Review of Economics & Statistics, 52(1), 68–74.
  • Feuerherdt, C., Gray, S., & Hall, J. (2010). The Value of Imputation Tax Credits on Australian Hybrid Securities. International Review of Finance, 10(3), 365–401.
  • 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(2), 161–188.
  • Grammatikos, T. (1989). Dividend Stripping, Risk Exposure, and the Effect of the 1984 Tax Reform Act on the Ex-Dividend Day Behavior. Journal of Business, 62(2), 157–173.
  • Harris, T. S., Hubbard, R. G., & Kemsley, D. (2001). The share price effects of dividend taxes and tax imputation credits. Journal of Public Economics, 79(3), 569–596.
  • Kalay, A. (1982). The Ex-Dividend Day Behavior of Stock Prices: A Re-Examination of the Clientele Effect. Journal of Finance, 37(4), 1059–1070.
  • Lamdin, D. J., & Hiemstra, C. (1993). Ex-Dividend Day Share Price Behavior: Effects of the Tax Reform Act of 1986. Review of Economics & Statistics, 75(4), 778–783.
  • Miller, M., H., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), 411–433.
  • Poterba, J. M. (1986). The market valuation of cash dividends. Journal of Financial Economics, 15(3), 395–405.
  • Poterba, J. M., & Summers, L. H. (1984). New Evidence That Taxes Affect the Valuation of Dividends. Journal of Finance, 39(5), 1397–1415.

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Arfian Erma Zudana, S.E., M.Bus. (Acc), Ph.D., Cert.DA.