Influence of moisture absorption on electrical properties and charge dynamics of polyethylene silica-based nanocomposites
Summary (3 min read)
Introduction
- IF CAPITAL MARKETS WERE PERFECT, a stock’s price would fall by the amount of the dividend on the ex-day.
- They claim that the ex-day price of a stock will change by the price increment equal to, or just smaller than, the size of the dividend payment.
- The tax argument is that the price drop is less than the dividend because high personal taxes on dividends (relative to capital gains) reduce the value of the dividend (e.g., Elton and Gruber (1970), Litzenberger and Ramaswamy (1979), Lakonishok andVermaelen (1986), Karpo¡ andWalkling (1990), and Michaely and Vila (1995)).
- This is evidence against the ex-dividend day premium deviating from one due to price discreteness (either directly as in Bali and Hite (1998) or indirectly via its e¡ect on bid^ ask bounce as in Frank and Jagannathan (1998)).
- Third, Karpo¡ and Walkling (1990) show that ex-day returns are positively correlated with the spread, consistent with transaction costs a¡ecting ex-day returns via arbitrage trading.
I. Theory and Empirical Hypotheses
- The explanations of ex-day price behavior canbe categorized into three groups.
- 4 Frank and Jagannathan (1998) demonstrate that the premium is signi¢cantly less than one in Hong Kong, even though dividends and capital gains are not taxed, consistent with the nuisance hypothesis.
- As the pricing grid becomes ¢ner, the positive association between the premium and dividend yield shouldweaken, also known as HYPOTHESIS 3.
- Assuming risk neutrality and using a simple arbitrage argument, Kalay focuses on the impact of transaction costs to show that if the ex-day premium is less than 1.0, tax-free arbitrageurs will purchase stocks cum-dividend and sell ex-dividend, obtaining the dividend in a risk-free transaction.
- Many studies ¢nd that the premium is closest to one and abnormal ex-day volume is highest among high dividend yield and low transaction cost stocks, which is consistent with arbitrage or dividend capture activity where one would most expect to ¢nd it.6.
II. Data and Sample Selection
- Finally, note that the holding period required to qualify for long-term capital gains tax treatment was 12 months in all three eras, except from July 29, 1997 to December 31, 1997, when the holding period was temporarily 18 months.
- The sample includes quarterly dividend-paying ¢rms listed on the NYSE that have information available in both CRSP and TAQ databases.
- The standard error of the sample mean is denotedbySE.
A.1. Closing Prices Using CRSPData
- 10 Consistent with prior literature (e.g., Bessembinder (2001)), the authors ¢nd that quoted depth has fallen in the decimal era.
- To the extent that bid-ask spreads measure the relevant costs in ex-day transactions, the results inTables II and III are also not consistent with the more general transaction cost explanations.
A.2. Close-to-Open andMidpoint Pricing UsingTAQData
- Thus far, their analysis has been based on CRSP daily closing prices, which has been the standard methodology in previous research.
- Therefore, the authors conclude that the di¡ering length of the holding period during the 1/16 era does not signi¢cantly a¡ect their results.
- Second, if, as some models argue (e.g., Elton and Gruber (1970)), the entire ex-day price movement occurs between the closing price of the cum-day and the opening price of the ex-day, using closing prices on the ex-day adds noise and reduces their ability to make accurate inferences.
- This is opposite the pattern that should occur if price discreteness or bid-ask e¡ects are the dominant Table IV Premiums and Ex-DayAbnormal Returns by Era Using Quote Midpoints.
B. Portfolios Based on DividendYield (Tests of Hypothesis 3)
- The microstructure theories imply that the positive relation between the premium and dividend yield occurs because the relative importance of microstructure e¡ects relative to dividends declines with the size of the dividend.
- This implies that the association between dividend yield and ex-day premiums and returns should decline as the pricing grid becomes ¢ner (Hypothesis 3) because of a reduction in price discreteness (Bali and Hite (1998)), bid-ask bounce (Frank and Jagannathan (1998)), or transaction costs (to the extent that bid-ask spread measures the relevant transaction cost).
- Across eras, abnormal returns are greater in the decimal era than in the other eras, and, if anything, decline more precipitously with dividendyield in the decimal era, opposite Hypothesis 3.
- If anything, the relation becomes more pronounced.
C. Transaction Cost Explanations of Ex-day Behavior
- The preceding sections indicate that neither price discreteness nor bid-ask bounce alone is the reason for the observed ex-dividend day price behavior.
- Examining bid-ask spreads averaged within eras is not su⁄cient to test transaction cost models.
- First, these transaction cost models have implications about changes in ex-day pricing (Hypothesis 4) and volume (Hypothesis 5) that the authors have not yet tested.
- The authors investigate the relation between the actual reduction in spreads and ex-day pricing and volumebehavior.
- Second, the bid-ask spread is not the only component of transaction costs.
C.1. Transactions Costs and Ex-dividend Day Pricing (Tests of Hypothesis 4)
- Hypothesis 2 states that a decline in transaction costs should cause the premium to be closer to one, and Hypothesis 4 asserts that this movement should be greatest for stocks with the largest reduction in transaction costs.
- 18 This enables us to determine whether changes in the bid-ask or depth component of transactions costs a¡ects ex-day returns, holding the impact of dividend yield changes constant.
- The sample includes quarterly dividend-paying ¢rms listed on the NYSE that have information available in both CRSP and TAQ databases.
- The D DivYield is the change in average dividend yield.
C.2. Transactions Costs and Ex-Dividend DayVolume (Tests of Hypothesis 5)
- Research about volume in the United States (Lakonishok andVermaelen (1986) and Michaely and Vila (1996)), Italy (Michaely and Murgia (1995)), Japan (Kato and Loewenstein (1995)), and Sweden (Green and Rydqvist (1999)) indicates that there is abnormal trading activity around the ex-day.
- Normal trading volume (i.e., not in the event window) increased signi¢cantly in recent years.
- Jones and Lipson (2001) suggest that a consequence of the decrease in minimum spreads is that liquidity has fallen for large trades, consistent with the reduction inex-daydepththe authors documentedearlier.
- This result is consistent withour earlier statement (based on Table VII) that either bid-ask spreads did not constrain dividend capture and arbitrage trading in the 1/8 era, or else some other cost has increased to o¡set the reduction in spreads, with the end result being no noticeable increase in dividend capture trading.
IV. Conclusion
- The authors analyze ex-day price and volume reactions to the dramatic reduction in price discreteness and bid-ask spreads that occurred as the pricing grid changed from 1/8s to 1/16s to decimals.
- If the price discreteness of Bali and Hite (1998) or the bid-ask bounce of Frank and Jagannathan (1998) are the dominant factors driving ex-day activity, then the authors should observe ex-day premia getting closer to one and abnormal returns approaching zero as the pricing grid becomes ¢ner.
- This is consistent with dividend capture or arbitrage activity forcing the premium to approach one for high-dividend yield stocks (because the reward for such activity outweighs the costs).
- In summary, their results are not consistent with the microstructure explanations of the price movement between the cum-day and the ex-dividend day; however, they are consistent with the tax explanation.
- It is also possible that ex-day pricing patterns are caused by a phenomenon that has not yet been identi¢ed in the ¢nancial economics literature.
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