Ex-dividend day price behaviour on the Stockholm Stock Exchange: An empirical study of the Stockholm Stock Exchange 2001-2005

Abstract: How is a company's share price adjusted on the day when the dividend right is separated? For the current institutional setting, we find that the price ratio is on average less than one on the Stockholm Stock Exchange. Our study thus confirms that differential taxes cannot fully explain the ex-dividend day share price behaviour. We identify three main factors, besides taxes, that investors take into account when they trade around the ex-dividend day. First, investors seem to value the potential gains from dividend-capturing trading lower than the risks associated with lower dividend yield shares. Second, we have found evidence that price discreetness significantly lowers the price ratio. Third, transaction costs lower the efficiency of the price ratio. For investors on the Stockholm Stock Exchange there are two main implications of our study: i) the ex-dividend day share price adjustment is efficient when noise, firm-specific risks and trading costs are considered, ii) there are no risk-adjusted benefits on average from dividend-capturing trading in shares; however, there could still be opportunities for arbitrage profits by trading in derivatives which are priced using an implied price ratio of one.