Investigation of the costly-arbitrage model of price formation around the ex-dividend day in Norway

Qinglei Dai, Kristian Rydqvist

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

We estimate the costly-arbitrage model of Boyd and Jagannathan [Boyd, John, and Jagannathan, Ravi, 1994, Ex-Dividend Price Behavior of Common Stocks, Review of Financial Studies 7, 711-741.] 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 conclude that uncertainty about the cash flows prevents arbitrage.

Original languageEnglish
Pages (from-to)582-596
Number of pages15
JournalJournal Of Empirical Finance
Volume16
Issue number4
DOIs
Publication statusPublished - 1 Sep 2009

Keywords

  • Costly-arbitrage model
  • Estimation risk
  • Ex-dividend day
  • Imputation-tax credit
  • Legal risk
  • Withholding tax

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