Staff Report 229

Why Do Stock Prices Drop by Less Than the Value of the Dividend? Evidence From a Country Without Taxes

Murray Frank
Ravi Jagannathan

Published March 1, 1997

It is well documented that on average, stock prices drop by less than the value of the dividend on ex-dividend days. This has commonly been attributed to the effect of tax clienteles. We use data from the Hong Kong stock market where neither dividends nor capital gains are taxed. As in the U.S.A. the average stock price drop is less than the value of the dividend; specifically, in Hong Kong the average dividend was HK $0.12 and the average price drop was HK $0.06. We are able to account for this both theoretically and empirically through market microstructure based arguments.

Published In: Journal of Financial Economics (Vol. 47, No. 2, February 1998, pp. 161-188)

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