Sep 21, 2009

Articles in journals

Borges, R.

36

13

Following a dividend distribution, investors expect the stock price to decrease on the ex-dividend day. With no market imperfections, the price decrease should exactly match the amount of the dividend, thus eliminating all opportunities for profitable arbitrage. Allowing for different taxes on dividends and on capital gains results in a stock price adjustment ratio different from one, but there is still a unique equilibrium. With a simple model, considering four types of investors, we show that the existence of transaction costs results in multiple possible equilibria (equilibrium zone), defined by the arbitrage boundaries of each type of investors. We also show that trading activity by the different types of investors is reflected in abnormal trading volume.

Dividend,Arbitrage,Market Equilibrium,Transaction Costs,Taxes,