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A Re-examination of Ex-Dividend Day Price Movements: Evidence from ADR Market
Bi - Huei Tsai, National Chiao Tung University
Shing - Yang Hu, National Taiwan University
Shu - Hsing Li, National Taiwan University
ABSTRACT. This paper re-examines the tax-induced behavior on ex-dividend days for American depositary receipts (ADRs) since ADRs provide us unique settings where all ADR investors are subject to identical foreign tax rate for given cash distributions. The purpose of this study is to analyze the influence of foreign tax costs and transaction costs on ex-dividend abnormal returns. This paper employs a sample of 6,461 cash dividend distributions of 528 firms from 42 countries from 1988 to 2004. The results exhibit prominent excess returns exactly on ADR ex-dividend days. Besides, the results of exhibit that abnormal returns on ex-dividend day are positively associated with foreign tax costs, the products of foreign tax rates and dividend yields, as well as transaction costs. Because foreign dividend income liability is composed of foreign tax rate and dividend yield, our finding supports tax-induced ex-dividend day trading activity constrained by transaction costs.
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