Stock Price Behavior on Ex-Dividend Dates. Hui-Ju Tsai * This Draft: 1/17/2017

Transcription

1 Stock Price Behavior on Ex-Dividend Dates Hui-Ju Tsai * This Draft: 1/17/2017 We examine the dynamic adjustment in the bid and asked prices surrounding ex-dividend days. For both NYSE- and NASDAQ-listed stocks, we find that the bid-ask spread is increased on exday. We show that there is an asymmetric adjustment in the bid and ask prices on ex-day and the asymmetry is more pronounced for NASDAQ-listed than for NYSE-listed firms. We find that the market makers tend to adjust the bid and ask prices such that more of the carrying cost on exday is borne by retail investors than by institutional investors who conduct dividend capturing behavior. JEL Classification: G14, G35 Keywords: Ex-dividend day; NASDAQ; Bid-ask spread; Microstructure * Tsai is the corresponding author at the Washington College, 300 Washington Avenue, Chestertown, MD 21620, htsai2@washcoll.edu.

2 I. Introduction The topic of abnormal stock returns around ex-days is of considerable interests to financial economists as well as practitioners since firstly documented in Campbell and Beranek (1955). Several hypotheses have been provided in the literature to explain stock price behavior around ex-dividend days. The well known tax hypothesis by Elton and Gruber (1970) indicates that the price-drop to dividend ratio being less than one on ex-days is due to differential tax treatments on dividend income and capital gains. Their study is followed by a number of empirical studies that examine the relation between tax rules and abnormal stock returns around ex-dividend days (see, e.g., Eades, Hess, and Kim, 1984; Barclay, 1987; Robin, 1991; Michaely, 1991; and Michaely and Vila, 1995; Bell and Jenkinson, 2002; Poterba and Summers, 1984; Lasfer, 1995; Green and Rydqvist, 1999; Booth and Johnston, 1984; and Kadapakkam and Martinez, 2008). Meanwhile, Kalay (1982) argues that the discrepancy between price drop and dividend amount on exdividend days gives tax-neutral or tax-advantaged investors an arbitrage opportunity and thus the price-drop to dividend ratio should reflect the transaction cost faced by the marginal arbitragers. Another strand of research examines the abnormal stock returns around ex-days from the perspective of market microstructure. Dubofsky (1992) and Dubofsky (1997) indicate that the abnormal returns on ex-days are caused by NYSE Rule 118 and AMEX Rule 132 that open limit buy orders are reduced on ex-dividend days to reflect dividend payments whereas open limit sell orders are not adjusted. Bali and Hite (1998) believe price discreteness is the main reason that causes price-drop to dividend ratio less than one. Their argument, however, is not supported by later evidence found in Graham, Michaely, and Roberts (2003) when the tick size goes to decimals. Meanwhile, Frank and Jagannathan (1998) propose the bid-ask bounce theory arguing that the market makers tend to buy shares on the cum-days and sell on the ex-days. However, 1

3 evidence inconsistent with the bid-ask bounce theory was later found in Koski and Michaely (2000), Graham, Michaely, and Roberts (2003), and Jakob and Ma (2003). Paudel and Silveri (2014) examine and compare the price-drop to dividend ratios of stocks listed on NYSE and NASDAQ. They find that, contrary to the evidence found for stocks listed on NYSE, the average price-drop to dividend ratio of stocks listed on NASDAQ decreases with the dividend yield and is significantly below the boundary suggested by the applicable tax rates. Further, they show the evidence from NASDAQ-listed firms cannot be explained by the short-term trading or market microstructure hypotheses proposed in current literature. This study proposes a model that considers the dynamic change in bid and asked prices surrounding ex-dividend dates. Unlike models in the current literature that usually assume a constant bid-ask spread on the cum- and ex-dividend dates, our framework allows market makers to dynamically change the bid-ask spread surrounding the ex-dividend dates. To the best of our knowledge, this is the first study that examines the asymmetric adjustment of bid and asked prices on ex-dividend days. Based on current tax regime, compared to institutional investors, retail investors face higher tax rates on dividend income than on capital gains. Thus, institutional investors are more likely to conduct dividend capture behavior and be the sellers on ex-div dates (Kalay, 1982). When institutional investors engage in dividend capturing behavior by buying shares before or on the cum-dividend dates and selling shares on or after the ex-dividend dates, market makers face a higher probability of carrying a larger inventory on the ex-dividend dates. We hypothesize that in order to compensate for higher carrying cost, the market makers increase the bid-ask spread on the ex-dividend dates. Further, since small investors are less elastic than institutional investors, we argue that market makers tend to adjust the bid and ask prices so that the carrying cost is more borne by retail investors than by institutional investors. We find 2

4 significant evidence consistent with our prediction. Specifically, we show that the bid-ask spread is increased on ex-day for both NYSE- and NASDAQ-listed firms. Additionally, we find an asymmetric adjustment in the bid and asked prices on ex-days. The increase in the asked price is larger in magnitude than the decrease in the bid price on the ex-dividend dates. We show the asymmetric adjustment is more pronounced for NASDAQ than for NYSE-listed firms. Our study indicates the dynamic change in bid and asked prices is an important factor that affects stock price behavior on ex-dividend dates especially for NASDAQ-listed stocks. The remainder of the paper is organized as follows. Section II is a brief summary of previous research on the behavior of stock price on ex-days. In section III, we describe the data selection process and the data used in the study. Section IV, we present our model. In section V, we apply our method to evaluate the effect of bid-ask spread adjustment on the price drop ratios on the exdividend dates. Some concluding remarks are provided in the section VI. II. Literature review The earliest study that documented the positive abnormal returns on the ex-dividend day can be traced back to Campbell and Beranek (1955). They show that the average price drop on the exdividend day on average is less the amount of dividend. Their work is followed by a large literature that proposed several explanations to justify the abnormal returns around the exdividend day. Elton and Gruber (1970) show that the abnormal returns on the ex-day are mainly driven by taxes. They argue that since investors consider after-tax returns, the price-drop to dividend ratio should reflect the marginal rate of substitution between dividend and capital gains. When the tax rate on dividend income faced by marginal investors is higher than that on capital gains, the price-drop to dividend ratio is less than one on the ex-day. Further, Elton and Grube 3

5 (1970) find evidence supporting the tax-clientele hypothesis. That is, higher dividend payments are more attractive to investors with lower tax brackets and thus their price-drop to dividend ratios are higher than the ratios corresponding to lower dividend payments. Elton and Gruber s (1970) tax-related argument is supported by several empirical studies that examine ex-day stock price behavior surrounding tax reforms in the US. Whitworth and Rao (2010), for instance, exam stock prices around ex-dividend dates in the US from 1926 to 2005 and find evidence consistent with Elton and Grube s (1970) tax hypothesis (see, also, Barclay, 1987; Robin, 1991; Michaely, 1991; and Michaely and Vila, 1995). Further, Whitworth and Rao (2010) show that the positive relation between dividend yield and price-drop to dividend ratio is strengthened during periods when the tax differential between dividend income and capital gains increases. Elton and Gruber s (1970) framework is also tested in countries other than the US. Bell and Jenkinson (2002), for instance, examine ex-dividend stock price behavior before and after a major change in dividend taxation in the UK in 1997 and find significant evidence supporting the tax clientele effect (see, also, Poterba and Summers, 1984; and Lasfer, 1995). Studying Swedish lottery bonds that offer tax advantages to coupon payments relative to capital gains, Green and Rydqvist (1999) observe the behavior of bond prices around ex-day consistent with the tax hypothesis. Meanwhile, Booth and Johnston (1984) study the ex-day price-drop to dividend ratio in Canada but fail to find much evidence supporting the tax clientele effect. Evidence inconsistent with Elton and Gruber s (1970) tax hypothesis is also found in Kadapakkam and Martinez s (2008) study on the ex-day abnormal returns in Mexico that offers dividend tax credit to individual investors. Similarly, Eades, Hess, and Kim (1984) find that the ex-day returns of several taxable and non-taxable distributions in the U.S. are inconsistent with the implication of taxation hypothesis. 4

6 Not all investors face unfavorable tax treatment on dividend income relative to capital gains. Corporations, for instance, may prefer dividend because 70% of dividend income they receive is tax free. Institutional investors and tax-exempt investors may be indifferent between dividend income and capital gains. Kalay (1982) argues that the discrepancy between price drop and dividend amount gives tax-neutral or tax-advantaged investors an arbitrage opportunity. These arbitragers can trade to capture the dividends by buying on or before the cum-day and sell on or after the ex-day. Kalay (1982) argues that the price-drop to dividend ratio should reflect the transaction cost faced by the marginal arbitragers. Kalay s (1982) dividend capture hypothesis is supported by several empirical studies. Lakonishok and Vermaelen (1986), for instance, find abnormally high trading volumes around ex-dividend days, especially for high-yield stocks. Besides, they show that there are abnormal price increases before ex-dividend days and abnormal price decreases after ex-dividend days (See, also Karpoff and Walking, 1988). Boyd and Jagannathan (1994) propose a model in which the price-drop to dividend ratio in equilibrium is determined by the interaction among taxable individuals, tax-advantaged dividend captures, and tax-neutral arbitragers. Their study suggests that the marginal investors are short-term arbitragers. Similarly, Michaely and Vila (1996) propose a dynamic trading clientele theory, showing that the price-drop to dividend ratio is the result of interaction of investors who face different tax charges on dividend income relative to capital gains. Consistent with the dynamic trading clientele theory, Michaely and Murgia (1995) examine stocks listed on Milan Stock Exchange and find that the abnormal trading volume on ex-dividend day is positively related to the heterogeneity in the taxation of dividend income relative to capital gains across investors. Dhaliwal and Li (2006) show that ownership heterogeneity (i.e., the proportion of individual investors relative to that of institutional investors) increases with abnormal trading volume on 5

7 ex-dividend days. Examining the trading behavior of all investors in the Finnish stock market, Rantapuska (2008) find that idiosyncratic risk, transaction cost, and dividend yields are important factors that affect the short-term trading behavior on ex-dividend days. Similarly, Henry and Koski (2014) examine transactions from institutional investors and find the significant abnormal trading volume is positively related to dividend yield but negatively to idiosyncratic risk. They show that after the consideration of transaction cost, not all dividend capturing behavior from institutional investors produces positive returns. Another strand of research that tries to explain the positive abnormal returns on the ex-day is related to microstructure. Dubofsky (1992) and Dubofsky (1997) show that due to NYSE Rule 118 and AMEX Rule 132, open limit orders to buy stock must be reduced by the cash dividend amount or the next lower eighths if the dividend amount is not a multiple of 1/8s on ex-dividend days whereas the limit orders to sell are not changed. Dubofsky (1992) and Dubofsky (1997) demonstrate that these rules lead to positive abnormal ex-day return (see also Akhmedov and Jakob, 2010). Bali and Hite (1998) argue that due to the price discreteness, price drop on the exdividend date is less than the dividend but within one tick of the dividend. Their argument, however, is not supported by later evidence when the tick size goes from 1/8s to 1/16s and later to decimals (see, for instance, Graham, Michaely, and Roberts, 2003). Meanwhile, Frank and Jagannathan (1998) propose the bid-ask bounce theory. They indicate that ordinary investors find the collection of dividends a nuisance and thus market makers tend to buy shares on the cumdividend dates and sell them on the ex-dividend dates, causing positive abnormal returns on the ex-days. Their model suggests an order imbalance on the cum- and ex-dividend dates, which is partly supported by the evidence found by Jakob and Ma (2003). Using transaction data from the CRSP and Transaction Order and Quote (TORQ) database for the period of November 1990 to 6

8 January 1991, Jakob and Ma (2003) find more buy than sell orders on the ex-dividend dates as predicted by Frank and Jagannathan (1998). Further, Jakob and Ma (2003) do not find evidence of share or order imbalance on the cum-dividend dates, which disagrees with the prediction by Frank and Jagannathan (1998). Koski and Michaely (2000) and Graham, Michaely, and Roberts (2003) also find evidence that is inconsistent with the bid-ask bounce theory. III. Data Description We consider all dividend payments with code 12N2 made by domestic companies in CRSP during the period from January 1, 1983 through December 31, We require share price on the cum-dividend date at least $1 and the dividend amount at least $0.01 (Whitworth and Rao, 2010). To be included into the sample, firms must have the same number of shares outstanding on the cum- and ex-dividend date, the trading volume on both dates must be positive, and the dividend yield is no more than 0.1 (Kadapakkam, 2000; Paudel and Silveri, 2014). Announcements with more than 365 days or less than 4 days between ex-dividend days also excluded from the sample (Eades, Hess, and Kim, 1984; Paudel and Silveri, 2014). We follow the literature by computing the ex-dividend-day price drop ratio as P PDR= P D cum E ex, where D denotes the dividend amount, and P cum and E P ex respectively represent closing stock price on cum-dividend date and expected stock price on the ex-dividend date. E P ex is obtained by discounting the actual ex-dividend date closing price by the expected stock return on the same day. 1 We require the companies to have share code 10 or 11 to be included in the analysis. 7

9 To determine the expected stock return, we follow Paudel and Silveri (2014) by applying market model on returns during days (-50, -6) and (6, 20) relative to the ex-dividend date and requiring that there must be at least 30 days of returns available. We are left with a sample of 192,933 dividend announcements after these screenings. To remove outliers, we sort the announcements according to their PDR and remove the top and bottom 1 percent of events from our sample. The remove of outliers leaves us with a sample of 109,663 and 68,199 dividend announcements made by 2,683 and 3,302 NYSE-listed and DASDAQ-listed firms, respectively. Table 1 summarizes the descriptive characteristics of the sample. Not surprisingly, the average size of firms listed on NYSE is much larger than that of firms listed on NASDAQ, with average market value equal to $6.80 billion and $1.25 billion, respectively. On the ex-dividend date, the trading volume of NYSE firms is significantly higher than that of DASDAQ firms. The difference in the liquidity between the two groups of firms also reflects in the bid-ask spread. On the ex-dividend date, the average bid-ask spread of NYSE-listed and NASDAQ-listed firms are 0.23 and 0.35, respectively, which are equal to 0.86 percent and 1.90 percent of stock price. The average amount of dividends paid by NYSE-listed firms is $0.23, higher than the $0.15 paid by NASDAQ-listed firms. However, due to the fact that on average NASDAQ listed-firms have lower stock prices, the dividend yields of these two groups of firms are not significantly different. The average dividend yields of NYSE-listed and NASDAQ-listed firms are equal to percent and percent, respectively. Between these two groups of firms, we do not find a significant difference in the number of days from declaration dates to the ex-dividend dates and from the ex-dividend dates to the payment dates. On average, there are around days between declaration dates and ex-dividend dates and days between ex-dividend dates and payment dates. 8

10 The average return on the ex-dividend date for NASDAQ-listed firms is 0.47 percent, higher than the average return of 0.16 percent for NYSE-listed firms. The average and median pricedrop ratio of NYSE-listed firms are 0.91 and 0.93, whereas the corresponding ratios of NASDAQ-listed firms are 0.51 and Consistent with the finding of Paudel and Silveri (2014), the price-drop ratio of NASDAQ-listed firms is significantly lower than that of NYSElisted firms. A comprehensive study conducted by Paudel and Silveri (2014) suggests that neither taxation nor other hypotheses proposed in current literature alone can reconcile the evidence found in the NASDAQ-listed firms with that in the NYSE-listed firms. That is, although the price-drop ratio of NYSE-listed firms can be reasonably justified with the taxation or some other alternative hypotheses, the price-drop ratio of NASDAQ-listed firms is too big to be justified with current hypotheses in the literature. IV. Model Specification We consider the following framework: P ex, ask Pcum, ask D Sask, and (1) P ex, bid Pcum, bid D Sbid, (2) where P ex, bid and ex ask P, denote the bid and ask prices on the ex-dividend dates, P cum, bid and P cum, ask represent the bid and ask prices on the cum-dividend dates, respectively. S bid and S ask respectively measures the adjustment of bid and ask spreads on the ex-dividend dates. Figure 1 illustrates the adjustment of bid and ask spreads on the ex-dividend date. 9

11 The bid and ask prices on the ex-dividend dates is determined by the bid and ask prices on the cum-dividend dates and the adjustment of dividend payment and changes in the bid and ask spread. This model is an extension of the framework proposed by Jakob and Ma (2003). Unlike the assumption made by Jakob and Ma (2003) that the bid-ask spread on the ex-dividend dates is the same, we allow the market makers to adjust the bid-ask spread on the ex-dividend dates to compensate for the additional carrying cost. In a study of Australia stock market, Ainsworth and Lee (2014) find that order placement becomes aggressive before ex-day due to higher waiting cost and the corresponding effective bid-ask spread declines on the cum-day but increases on the ex-day. Further, our model allows the market makers to asymmetrically adjust the bid and ask prices. According to Conrad and Conroy (1994), to compensate for the additional carrying cost, the market makers make adjustment of the bid and ask prices such that investors with the most inelastic demand bear more cost. When the dividend capturing behavior is conducted mostly by institutional investment, we anticipate the market makers to receive more sell orders from institutional investors relative to retail investors and more buy orders from retail investors relative to institutional investors on the ex-dividend dates. Since the institutional investors have more bargaining power than the retail investors, we hypothesize the market makers to impose more carrying cost to the retail investors than to the institutional investors. That is, the market makers adjust the bid and ask prices such that the increment of ask price is higher than the decrease in bid price. According to Jakob and Ma (2003), the change in security price on the ex-dividend date can be written as 1 cum Pcum, bid expex, ask ex Pex bid, (3) P cumpcum, ask 1, 10

12 where ΔP denote the change of share price from the cum-dividend to the ex-dividend date, and cum and ex respectively represent the probability of a buy order on the cum- and ex-dividend dates. To measure the probability of a buy order, we follow Keim (1989) and Conrad and Conroy (1994) by defining P P cum cum, bid cum, and (4) Pcum, ask Pcum, bid P P ex ex, bid ex, (5) Pex, ask Pex, bid where Pcum and Pex are closing transaction prices on the cum- and ex-dividend dates, respectively. A higher value of indicates a tendency to close at the ask price and thus implies a higher probability of a buy order. Substituting equations (4) and (5) into equation (3) gives S S P P D P Sbid ex ask bid ex cum cum, ask cum, bid. (6) Based on the above model, we conduct the following regression analysis on NYSE- and NADSAQ-listed firms separately: S S P P D P ex ask bid ex cum cum, ask cum, bid 11

13 V. Empirical Results A. Summary Statistics Panels A and B of table 2 present summary statistics of bid and ask return, probability to buy, and spread for NYSE- and NASDAQ-listed firms, respectively. The bid (ask) return of NYSElisted firms is 0.15 (0.15) percent, whereas the bid (ask) return of NASDAQ-listed firms is 0.49 (0.52) percent. In untabulated tests, we find the bid and ask returns of NASDAQ-listed firms are significantly higher than those of NYSE-listed firms at a significance level of 0.01, which is consistent with previous finding that the price-drop ratio of NASDAQ-listed firms is significantly lower than that of NYSE-listed firms. The bid-ask spread of NYSE-listed firms on cum-dividend date is , which is not significantly different from the spread of on ex-dividend date. For NASDAQ-listed firms, the bid-ask spread on cum-dividend date is , which is significantly lower than the bid-ask spread of on ex-dividend date at a significant level of Our test shows that the bid-ask spread of NASDAQ-listed firms is significantly higher than that of NYSE-listed firms on both dates. The probably to buy on the cum- and ex-dividend date of NYSE-listed firms are equal to 0.54 and 0.53 percent, respectively, both of which are significantly higher than 0.5 at a significance level of That is, on the cum- and ex-dividend dates, it is more likely to receive a buy order. We also find the probability to submit a buy order is higher on cum-dividend date than on ex-dividend date. For NASDAQlisted firms, the probabilities to submit a buy order on cum- and ex-dividend dates are equal to 0.51 and 0.49, respectively. Our statistical analysis suggests that while the probably to submit a buy order on cum-dividend date is significantly higher than 0.5, the probability to submit a buy order on ex-dividend date is significantly lower than 0.5. That is, while it is more likely that investors submit a buy order on cum-dividend date, investors tend to submit a sell order on ex- 12

14 dividend dates. This is consistent with the dividend chasing behavior that investors buy on or before cum-dividend dates to receive announced dividend and sell shares on or after ex-dividend dates. An untabulated comparison between the probability to submit a buy order between NYSEand NASDAQ-listed firms shows that at a significant level of 0.01, it is more likely that investors submit a buy order on cum- and ex-dividend dates for NYSE-listed than for NASDAQlisted firms. B. Regression Result Table 3 presents regression results. It results show that although adjustment of bid spread on the ex-dividend dates is positive for NYSE-listed firms, the adjustment for NASDAQ-listed firms is negative, both of which are significantly different from zero. That is, after the consideration of dividend, the bid price on ex-dividend date is lower than the bid price on cum-dividend date by for NYSE-listed firms. On the contrary, the bid price on ex-dividend date is higher than the bid price on cum-dividend date by for NASDAQ-listed firms. The regression based on the entire sample also suggests that the adjustments of bid spread between NYSE- and DASDAQ-listed firms are significantly different. The coefficient of (λex- λcum) measures the bidask spread on cum-dividend dates. Since NASDAQ-listed stocks are usually smaller issues and less frequently traded, the bid-ask spread of NASDAQ-listed firms is larger than that of NYSElisted firms. Thus, if the model is well specified, both the coefficients of (λex- λcum) and of (λexλcum)*i_nasdaq should be significantly positive. Consistent with the prediction, the estimated bid-ask spreads on cum-day for both NYSE- and NASDAQ-listed firms are significantly positive and the latter being significantly larger than the former. 13

15 The coefficient of λex measures the total adjustment of bid and ask spreads, which is significantly positive and equal to and for NASDAQ- and NYSE-listed firms, respectively. The positive total adjustment of bid and ask spreads agrees with recent finding in Ainsworth and Lee (2014) on Australia stock market that the effective bid-ask spread increases on the ex-day. The increase in bid-ask spread on ex-day agrees with our argument that on ex-dividend dates market makers have to carry a larger inventory and thus they increase the bid-ask spread to compensate for the higher carrying cost. Thus, contrary to the assumption made by other studies in the current literature that the bid-ask spreads on cum- and ex-dividend dates are the same, our result indicates an increase in the bid-ask spread on ex-days for both NYSE- and NASDAQ-listed stocks. Given the estimates of bid spread and the total adjustment of bid and ask spread, the regression result suggests an adjustment of ask spread being equal to and for NASDAQ- and NYSE-listed firms, respectively. That is, after the consideration of dividend, the ask price on exdividend date is higher than that on cum-dividend date by (0.1045) for NASDA-listed (NYSE-listed) firms. The analysis based on the entire sample suggests the adjustment on the ask spread is significantly higher for NASDAQ-listed than for NYSE-listed firms. Our results indicate an asymmetric adjustment of bid and ask prices on ex-dividend dates. For NYSE-listed firms, the bid price on ex-day is lower than that on cum-day by whereas the ask price on ex-day is higher than that on cum-day by This result agrees with our argument that the market makers adjust bid and asked prices on ex-day so that the inventory carrying cost is more borne by inelastic retail investors than by institutional investors. Institutional investors do not face higher tax rate on dividend income relative to capital gains, and thus are more likely to conduct dividend capturing behavior and be the sellers on ex-day. The marker makers would 14

16 adjust bid and ask prices so that retail investors have to pay a bit more at ask price to buy shares on ex-day while institutional investors can sell their shares at relatively better bid prices. The asymmetric adjustment is more pronounced for NASDAQ-listed firms. For firms listed on NASDAQ, the bid price on ex-day is higher than that on cum-day by while the ask price on ex-day is higher than that on cum-day by That is, after the adjustment of dividend payment, both the bid and asked prices of NASDAQ-listed firms are higher on ex-days than on cum-days. This may explain Paudel and Silveri s (2014) finding that the price-drop ratio of NASDAQ-listed firms is significantly lower than that of NYSE-listed firms. Compared to the adjustment of bid and asked priced of NYSE-listed stocks, the asymmetric adjustment of NASDAQ-listed stock prices on ex-days seems to suggest that market makers of NASDAQlisted stocks tend to favor institutional investors engaging in dividend capturing behavior while having retail investors bear most of the carrying cost on ex-days. VI. Conclusions We examine the role of bid and ask price adjustment in stock price behavior on ex-dividend days. Unlike studies in current literature that usually assume a constant bid-ask spread on the cum- and ex-dividend dates, we find the market makers dynamically change the bid and ask prices surrounding the ex-dividend dates to compensate for higher inventory cost. Examining stock price surrounding ex-days during the period from January 1, 1983 through December 31, 2014, we find bid-ask spread is increased on ex-day for both NYSE- and NASDAQ-listed firms. We show that the market makers tend to adjust the bid and ask prices on ex-days so that more of the carrying cost is borne by retail investors than by institutional investors who conduct dividend capturing behavior. Further, the asymmetric adjustment in the bid and asked prices on ex-day is more pronounced for NASDAQ-listed than for NYSE-listed firms. Our study demonstrates the 15

17 importance of considering the dynamic adjustment of bid and asked prices while studying the stock price behavior surrounding ex-dividend days, especially for NASDAQ-listed firms. 16

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21 Table 1 Descriptive Statistics This table presents average, median, and standard deviation (S.D.) of the following variable: 1) DivYield: dividend yield, 2) Return: stock return on ex-dividend dates, 3) PDR: price-drop to dividend ratio, 4) DivAmt: dividend amount, 5) Price: stock price on exdividend date, 6) Spread: bid-ask spread on ex-dividend date, 7) ShareOut: number of shares outstanding, 8) MarketVal: Market value, 9) Vol: trading volume, 10) Ex_Ann: number of days from dividend announcement to ex-dividend dates, 11) Pay_Ex: number of days from ex-dividend dates to payment dates NYSE NASDAQ Average Median S.D. Average Median S.D. DivYield Return *** PDR 0.91*** DivAmt 0.23*** Price 35.76*** Spread 0.23*** ShareOut 160,057*** 46, ,761 42,564 10, ,113 MarketVal 6,803,026*** 1,415,065 21,672,134 1,251, ,172 10,794,413 Vol 926,630*** 153,200 3,731, ,804 16,550 2,766,176 Ex_Ann 23*** Pay_Ex 24***

22 Table 2 Summary Statistics of Stock Price Behavior on Ex-dividend Dates This table shows average, median, and standard deviation (S.D.) of stock returns, bid-ask spread, and the probability to buy on exdividend and cum-dividend dates. Bidreturn (Askreturn) is the return on ex-dividend date based on closing bid (asked) price. Spread_ex and spread_cus represent the bid-ask spread on ex- and cum-dividend dates, respectively. Location_ex and location_cum measure the probability to by on ex-dividend and cum-dividend dates, respectively. Table 2 NYSE NASDAQ Average Median S.D. Average Median S.D. bidreturn askreturn spread_ex location_ex spread_cum location_cum

23 Table 3 This table presents regression result of the model: P S S S P P D bid ex ask bid ex cum cum, ask cum, bid, where D represents dividend amount, ΔP denotes the change of share price from cum-dividend to ex-dividend dates, and cum and ex respectively represent the probability of a buy order on the cum- and ex-dividend dates. The regression is conducted on NYSE-and NASDAQ-listed firms separately and on the entire sample firms that are listed on either NYSE or NASDAQ. NASDAQ NYSE ALL Coefficient Std. Error t-statistic Coefficient Std. Error t-statistic Coefficient Std. Error t-statistic Intercept *** ** ** λ_ex *** *** *** λ_ex-λ_cum *** *** *** NASDAQ *** NASDAQ*λ_ex ** NASDAQ*λ_ex-λ_cum *** R-squared Adjusted R-squared F-statistic Prob(F-statistic)

24 Figure 1 Pcum, ask Sask: Spread adjustment on ask price Pex, ask Pcum,ask-Dividend Pcum, bid Sbid: Spread adjustment on bid price Pcum,bid-Dividend Pex, bid Cum-dividend date Ex-dividend date 23