DP6074 Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day

Author(s): Qinglei Dai, Kristian Rydqvist
Publication Date: February 2007
Keyword(s): costly-arbitrage model, estimation risk, Ex-dividend day, imputation-tax credit, legal risk, withholding tax
JEL(s): C78, D40, G10, H26
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6074

We estimate the costly-arbitrage model of Boyd and Jagannathan (1994) using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We relate the difference in price formation to uncertainty.