Harmonization of International Taxation

7/28/2019 Harmonization of International Taxation

1/23

Managerial FinanceEmerald Article: Harmonization of international taxation: the case ofinterlisted stocks

Steven Graham, Wendy L. Pirie

Article information:

To cite this document: Steven Graham, Wendy L. Pirie, (2003),"Harmonization of international taxation: the case of interlisted

stocks", Managerial Finance, Vol. 29 Iss: 1 pp. 33 - 54

Permanent link to this document:

http://dx.doi.org/10.1108/03074350310768238

Downloaded on: 24-10-2012

To copy this document: [email protected]

This document has been downloaded 409 times since 2005. *

Users who downloaded this Article also downloaded: *

Jon-Arild Johannessen, Bjrn Olsen, (2011),"Aspects of a cybernetic theory of tacit knowledge and innovation", Kybernetes, Vol.

40 Iss: 1 pp. 141 - 165http://dx.doi.org/10.1108/03684921111117979

James DeLisle, Terry Grissom, (2011),"Valuation procedure and cycles: an emphasis on down markets", Journal of Property

Investment & Finance, Vol. 29 Iss: 4 pp. 384 - 427

http://dx.doi.org/10.1108/14635781111150312

John Dorchester Jr, (2011),"Market value, fair value, and duress", Journal of Property Investment & Finance, Vol. 29 Iss: 4 pp.

428 - 447

http://dx.doi.org/10.1108/14635781111150321

Access to this document was granted through an Emerald subscription provided by BIBLIOTECA CENTRALA UNIVERSITARA LUCIAN B

For Authors:

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service.

Information about how to choose which publication to write for and submission guidelines are available for all. Please visit

www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.com

With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in

business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as

well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is

a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive

preservation.

*Related content and download information correct at time of download.


2/23

Harmonization of International Taxation:The Case of Interlisted Stocks

by Steven Graham, Department of Economics, College of Arts and Science, ValparaisoUniversity, Valparaiso, Indiana, 46383 and Wendy L. Pirie, College of Business Admin-istration, Valparaiso University, Valparaiso, Indiana, 46383

Abstract

The fact that stocks going ex-dividend decline in price by less than the dividend amountis theoretically attributed to the differential taxation of dividend and capital gains or thedifferential taxation of investor groups. NYSE, Amex and Toronto Stock Exchange listedstocks, and stocks interlisted on these three exchanges, are examined to infer the tax juris-

diction of the marginal investor.

The stock price changes relative to the dividends are consistent with a tax clienteleeffect. Further, the stock price changes are plausible given the tax rates. Ex-dividend daybehavior is different for non-interlisted stocks on all three exchanges, suggesting each ex-change has a different tax clientele. Canadian firms interlisted on U.S. exchanges exhibitex-dividend day behavior consistent with the appropriate U.S. exchanges non-interlistedstocks, suggesting that the marginal investors in these stocks are American.

Introduction

In this study, the ex-dividend day behavior of interlisted stocks is compared to the ex-dividend day behavior of stocks that are exclusively listed in the U.S. or in Canada.1 Thealready high degree of integration of the Canadian and U.S. capital markets, includingtheir stock markets, presents an opportunity to test which countrys tax system influencesthe price reaction of interlisted stocks on the ex-dividend day. This addresses the ques-tion: Does the ex-dividend day behavior of interlisted stocks reflect the stock price behav-ior of stocks exclusively listed in one country versus the other, or is it an average?Liljeblom, Loflund and Hedvall [2001] find that stocks with high foreign ownership trad-ing on the Helsinki Stock Exchange have ex-dividend day price performance that lies out-side the no-arbitrage boundaries for Finnish investors. This is consistent with the resultsof this paper, that the marginal investor may not be a domestic taxpayer.

In making dividend decisions for a corporation, it is necessary that the corporateboard be aware of the tax effects on their shareholders. Where a corporation has a signifi-cant number of non-resident shareholders, the marginal investor may not be a resident ofthe country of incorporation.

In 1986, significant tax changes occur in both the United States and Canada, in-creasing the effective tax rate on capital gains income despite a reduction in the tax rateon ordinary income. The relationship between the taxes on dividends and those on capitalgains also changes. This paper examines the ex-dividend day behavior of common stocksin the two countries during the period 1982 to 1991, to test the impact of the significantreforms of 1986.

McKenzie and Mintz [1992] state, Although considerable work on the distortionscaused by taxes has been undertaken separately in each country, less has been done in the

Volume 29 Number 1 2003 33


3/23

way of a systematic comparison of the United States and Canada, especially on a histori-

cal basis.2

Two reasons are given for the importance of this. First, the free-trade agree-ments potentially impact on capital flows if differences in taxes create differences in costsof production. Second, the tax reforms in both countries have led to claims that the Cana-dian tax measures are a response to the U.S. measures so that capital flight is prevented. Isthis harmonization really necessary? If the markets behave as if they are integrated, thenperhaps it is not necessary for the government to act to harmonize the tax systems.

Increasing integration of global financial markets has resulted in the possibility thatstock price behavior is dependent upon institutional details, such as tax regimes, preva-lent in a country other than that of incorporation. This is important because it implies thatnational tax policies may not have the desired incentive effects on publicly traded compa-nies. The marginal investor in a stock may be a non-resident. Bailey [1988], studyingCanadas dual class shares, noted that: ... the characteristics of the marginal investor in

the market are not clear, given participation by Canadian, U.S., and other foreign inves-tors with varying tax situations (p. 1151).

Two alternative theories are advanced with respect to ex-dividend day stock pricebehavior where, commonly, the stock price is observed to decline by less than the amountof the dividend. The change in price, when the stock goes ex-dividend, is asserted to re-flect either the marginal tax rate of the marginal investor [Elton and Gruber, 1970] or, ifthe change in price would be sufficiently different from the amount of the dividend to at-tract the interest of short-term traders, the transaction costs involved in short-term trad-ing3 [Miller and Scholes, 1982, and Kalay, 1982]. If the empirical research supportseither of these two hypotheses, evidence is found that taxes influence behavior in finan-cial markets.

Although some researchers have suggested that the ex-dividend day price behavioris not necessarily consistent with a tax clientele effect [Dubofsky, 1992, Skinner, 1993,and Bali and Hite, 1998], Dempsey [2001] concludes that market behavior is consistentwith investors capitalizing a firms earnings on an after tax basis. Frank and Jagannathan[1998] find that there is an ex-dividend day price anomaly in Hong Kong where there isno taxes on dividends or on capital gains. However, in this paper we find that the mar-ginal investor in a country may not be a taxpayer in that country but may be subject totaxes in another jurisdiction. Koski and Scruggs [1998] find that there is evidence of divi-dend capture trading but they find little evidence of tax-clientele trading. However divi-dend capture trading is tax induced trading, where the firm capturing the dividend hasdifferent taxation of dividends and capital gains than other investors. In the U.K., Lasfer[1995] finds evidence that taxation does significantly affect ex-dividend day price behav-ior while Menyah [1993] concludes that the tax-induced dividend clientele effect is not

apparent. In New Zealand, Bartholdy and Brown [1999] find a tax clientele effect overthe period of their study. New Zealand is particularly suited for studying tax-clientele ef-fects, since corporations may distribute both taxable and non-taxable dividends. In Can-ada, Athanassakos [1996] finds that the tax clienteles change between corporations andtax-free investors over the period 1970 to 1984 depending on the particular tax regime atthe time.

Elton and Gruber [1970] find evidence of a dividend clientele: the higher (lower) isthe dividend yield, the lower (higher) is the implied tax bracket of the marginal investor.Stockholders in higher tax brackets prefer capital gains to dividends, relative to those in

Managerial Finance 34


4/23

lower tax brackets. Kalay [1982, 1984], Lakonishok and Vermaelen [1986], Karpoff and

Walkling [1988, 1990] and Stickel [1991] find that short-term trading limits the use ofex-dividend day behavior to infer the existence of dividend clienteles or the marginal taxrates of the marginal investor. Results capture both the impact of the marginal tax rates ofthe marginal investor and the activity of short-term traders. However, Karpoff and Walk-ling [1988] find no evidence of short-term trading prior to the introduction of negotiatedcommissions and support the Elton and Gruber proposition and findings over the periodthat Elton and Gruber examine. Naranjo, Nimalendran and Ryngaert [2000] confirm thatcorporate dividend capture programs seem to affect the ex-dividend day prices only afterthe era of negotiated commissions in 1975 in the U.S.

Preceding the work of Elton and Gruber [1970], Campbell and Beranek [1955] andDurand and May [1960] find that, in the U.S., the average stock price decline on the ex-dividend date is less than the amount of the dividend. They warn that the price drop-off

varies widely and that investors cannot necessarily count on an advantage from followingpolicies based on this information, except on average. Heath and Jarrow [1988] furtherextend the work on risk, stating that the ex-dividend day stock price behavior reflects theequilibrium trading process of investors who require a risk premium.

Other empirical studies investigate the effect of a tax regime change on ex-dividend day behavior [Lakonishok and Vermaelen, 1983, Booth and Johnston, 1984,Barclay, 1987, Grammatikos, 1989, Michaely, 1991, Robin, 1991, Manakyan et al, 1993,and Koski, 1996]. Particularly relevant to this research are the studies on the effect of theTax Reform Act of 1986 [Dubofsky and Kannan, 1993, Han, 1994, Robin, 1991, and Sid-diqi, 1997].

This paper tests the two alternate explanations regarding ex-dividend day price be-havior. The dividend distributing common stocks in the sample are divided into groupsbased on the country of incorporation of the issuing company: Canada or the U.S.; andbased on exchange listing: Toronto Stock Exchange (TSE), New York Stock Exchange(NYSE), American Exchange (Amex) or a combination of the TSE and either the NYSEor Amex.4 During the period of the study, 1982 to 1991, significant changes are made inthe tax regimes of both countries as well as other institutional changes.

The ex-dividend stock price behavior of domestically listed securities (not interna-tionally interlisted) is hypothesized to be different due to substantial differences in eachcountrys tax regimes. If exclusively Canadian listed, exclusively U.S. listed and in-terlisted stocks exhibit insignificantly different ex-dividend day behavior, this is evidenceof either global integration, that the behavior is expected to be similar or that taxes do not

matter. It is possible to distinguish between these explanations on the basis of expectedand actual ex-dividend day stock price behavior and by testing for abnormal volume.

We find that the ex-dividend day behavior for non-interlisted stocks are differenton all three exchanges. This is consistent with each exchange having different marginalinvestors. However, Canadian firms interlisted on the NYSE or Amex have ex-dividendday behavior consistent with U.S. incorporated NYSE or Amex listed firms, respectively.This suggests that the marginal investor for Canadian firms listed on a U.S. exchange is aU.S. investor. It appears that while domestic tax policy has some impact on ex-dividendday behavior, it is not the only variable with an impact.



5/23

Section II of this paper discusses the institutional changes that occur in the time pe-

riod under examination, including changes in the tax systems. Section III develops thetheory. The model originally developed by Elton and Gruber [1970] is extended and theshort-term trading model is considered. Section IV integrates the theory and institutionaldetails to develop specific hypotheses. Section V describes the data while Section VI dis-cusses the methodology. In section VII, the results are presented and the final sectionsummarizes the research and conclusions.

II. Institutional Changes

II.A. The U.S.

During the period 1982 to 1991, two major tax reforms occur, potentially impacting ex-

dividend day behavior. The 1984 Tax Reform Act changes the minimum holding periodto be eligible for a dividends received deduction5 from more than 15 days to more than 45days and disallows certain hedging strategies. These changes are expected to reduceshort-term trading as the risk increases with the longer required holding period.

The Tax Reform Act (TRA) of 1986 makes sweeping changes. At both the individ-ual and corporate level, the top marginal tax rate on ordinary income is reduced dramati-cally. Table 1 indicates the effects of the TRA on individual and corporate investors inthe top marginal tax brackets. The number of tax brackets for individuals is reduced, froma high in 1984 of 15 to a low in 1991 of 3. As of 1987, all capital gains exclusions areeliminated. The effect is that the rate of tax at the federal level on long-term capital gainsincreases at the personal and corporate level. The dividends received deduction at the cor-porate level is also altered such that taxes paid on dividends increase unless the recipientcorporation controls at least 80 percent of the dividend-paying subsidiary. As is apparentin Table 3, the 1986 TRA increases the shareholder level taxes on both dividends andcapital gains despite reductions in the tax rate on ordinary income.

II.B. Canada

In Canada, the Federal Budget of 1986 introduces some major tax reforms. Table 2 givesa summary of the tax rates for the years 1982, 1987, 1988 and 1991 for individuals andcorporations paying the top marginal tax rates. Tax rates are reduced at both the corporateand the personal level. At the personal level, consistent with tax simplification, thenumber of tax brackets for personal income tax is reduced from 10 to 3. The capital gainsinclusion rate is increased, with a resulting tax increase for capital gains at both the per-

sonal and corporate level, despite the tax rate reductions. The dividend tax credit systemis modified: the gross-up factor and the dividend tax credit is decreased. 6 This increasesthe effective tax rate on dividends at the personal level for the investor at the top marginaltax rate despite the reduced personal tax rate. The 1986 tax reforms in Canada result inless preferential treatment on income from equity investments, as shown in Table 4.

Another change over the period is the institution of negotiable commission rates inCanada effective April 1, 1983. The resulting decline in commission rates makes short-term trading in Canada more viable.



6/23

Table 1: Top Marginal Tax Rates in the United States (including surtaxes)

Personal - Federal Only ( 1 )

1982 1987 1988 1991

Ordinary income ( 2 )

L.T. capital gains50.020.0

38.528.0

28.028.0

31.028.0

Personal- Federal and New York

Ordinary income ( 3 ) , ( 4 )

L.T. capital gains64.025.6

47.336.8

36.436.4

38.935.9

Personal - Federal and California

Ordinary income ( 3 )

L.T. capital gains

61.0

27.2

47.8

37.3

37.3

37.3

42.0

39.0

Corporate - Federal Only

Ordinary income ( 5 ) , ( 6 )

Dividends - domesticL.T. capital gains

46.06.9

28.0

40.08.0

34.0

34.010.234.0

34.010.234.0

Corporate - Federal and New York

Ordinary income ( 3 ) , ( 5 ) , ( 7 )


56.011.938.0

49.012.543.0

43.014.743.0

43.014.743.0

Corporate - Federal and California

Ordinary income( 3 ) , ( 5 )


55.611.937.6

49.317.343.3

43.319.543.3

43.319.543.3

Notes:

( 1 ) The federal rate also represents the combined rate for states with no income tax, such as Texas.

( 2 ) Ordinary income includes short term capital gains and dividend income from both domestic and foreigncorporations. It is assumed that the withholding tax is fully utilized as a foreign tax credit.

( 3 ) The state tax is assumed to be calculated on the same taxable income as the federal tax.

( 4 ) New York City levies an additional tax at the top rate of 4.3% on individual income. Thus, the topmarginal tax rate in New York City on personal income could be as high as 43.2% in 1991.

( 5 ) Ordinary income includes short term capital gains.

( 6 ) The maximum tax rate on dividends from Canadian issuers equals the tax on ordinary income. Taxrelief is provided depending on the level of holdings. It is assumed that at the maximum tax rate, thewithholding tax is fully utilized as a foreign tax credit.

( 7 ) New York City levies an additional tax at the top rate of 9% on corporate net income. Thus, the topmarginal rate in New York City on corporate income could be as high as 52% in 1991.



7/23

Table 2: Top Marginal Tax Rates in Canada (including surtaxes)

Personal - Federal Only

1982 1987 1988 1991

Ordinary income( 1 )

Dividends-Cdn corp( 2 )

Capital gains

34.017.017.0

35.023.817.5

29.920.219.9

30.520.622.9

Personal - Federal and Ontario

Ordinary incomeDividends - Cdn corpCapital gains

50.325.225.2

52.035.326.0

46.131.230.7

48.032.436.0

Personal - Federal and Alberta

Ordinary income

Dividends - Cdn corpCapital gains

47.1

23.523.5

52.1

35.326.1

44.6

30.129.7

45.2

30.533.9

Corporate - Federal Only

Ordinary income( 3 )

Dividends - Cdn corpCapital gain

37.80.0

18.9

36.60.0

18.3

28.80.0

19.2

28.80.0

21.6

Corporate - Federal and Ontario


51.80.0

25.9

52.10.0

26.1

44.30.0

29.5

44.30.0

33.2

Corporate - Federal and Alberta


48.80.0

24.4

51.60.0

25.8

43.80.0

29.2

44.20.0

33.2

Notes:

( 1 ) The ordinary income rate equals the rate on dividends from U.S. corporations. It is assumed that thewithholding tax is fully utilized as a foreign tax credit.

( 2 ) The Dividends - Cdn corp must be received from a taxable Canadian corporation.

( 3 ) Dividends received from a U.S. corporation where holdings are less than 10% are taxed as ordinaryincome with a foreign tax credit available for withholding taxes. Where holdings are at least 10%, thereare no Canadian income taxes imposed but the foreign tax credit for withholding taxes cannot be applied.In these cases, the effective tax rate equals the withholding tax rate.

III. Theory

The tax clientele model assumes that investors with different tax circumstances invest insecurities with different characteristics. Given this model, the ex-dividend day behaviorof stock prices can be used to find the implied relationship between the tax on dividendsand the tax on capital gains for the marginal investor in the stock [Elton and Gruber,1970].

Elton and Gruber consider an owner who has decided to sell the stock. Before or onthe final cum-dividend date, i.e., the trading day immediately preceding the day the stock



8/23

goes ex-dividend (hereafter, the cum-date), the decision faced is to sell on the cum-dateand not receive the dividend or to sell on the ex-dividend day (hereafter, the ex-date) andreceive the dividend. If the stock is sold cum-dividend, the after-tax value received is

P t P PX c X O- -- -1 1( ) (1)

Where PX-1 is the selling price on the cum-date,

PO is the adjusted cost base in the stock for capital gains purposes, and

tc is the marginal tax rate on capital gains.

If the owner waits to sell on the ex-date, the after-tax value expected to be receivedis

D t E P t E P Pd X c X O

( ) [ ] ( [ ] )1- + - - (2)

where D is the amount of the cash dividend,

td is the marginal tax rate on dividends, and

E[PX] is the expected price on the ex-date.


Table 3: Indifference Tax Factors

1

1

-

-

t

t

d

c

for the U.S.

For the investor in the top marginal tax bracket.

Individual 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

FederalCombined- New YorkCombined- California

.625

.484

.536

.625

.484

.536

.625

.484

.536

.625

.486

.536

.625

.489

.536

.854

.834

.833

1.01.01.0

1.01.01.0

1.01.01.0

.958

.953

.951

Corporate

FederalCombined- New YorkCombined- California

1.2931.4211.338

1.2931.4211.338

1.2931.4211.338

1.2931.4211.338

1.2931.4211.338

1.3941.5351.459

1.3611.4961.420

1.3611.4961.420

1.3611.4961.420

1.3611.4961.420

Table 4: Indifference Tax Factors1

1

-

-

t

t

d

c

for Canada

For an investor in the top marginal tax bracket.

Individual 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

FederalCombined- OntarioCombined- Alberta

1.01.01.0

1.01.01.0

1.01.01.0

1.01.01.0

1.01.01.0

.924

.874

.876

.996

.993

.994

.996

.993

.994

1.0281.0541.051

1.0301.0561.051

Corporate

FederalCombined- OntarioCombined- Alberta

1.2331.3501.323

1.2271.3511.316

1.2331.3591.323

1.2201.3421.307

1.2331.3641.323

1.2241.3531.348

1.2381.4181.412

1.2381.4181.412

1.2761.4971.488

1.2761.4971.497


9/23

A risk-neutral owner is indifferent between selling on the cum-date and the ex-date

when

P t P P D t E P t E P PX c X O d X c X O- -- - = - + - -1 1 1( ) ( ) [ ] ( [ ] ) (3)

This can be rearranged to obtain

P E P

D

t

t

X X d

c

- -=

-

-1

1

1

[ ](4)

Transaction costs are not included since they are assumed to be equal in both cases.This model also assumes that all cash flows occur at the same time, that is, there is no dis-counting. Likewise, considering a buyer instead of a seller and assuming no discounting,we also get Equation (4).

The term 11

--

tt

d

c

is called the indifference tax factor (ITF) in this paper. This ITF

varies by investor group and with changes in the tax regime over time. The ITF reflectsthe amount a capital gain must be for an investor to be indifferent between it and a one-dollar dividend. If the market is in equilibrium, the marginal investor is indifferent be-tween selling on the cum-date or the ex-date.

The empirical testing of the model is restricted to the left-hand side of Equation (4)that is the same across all models. In interpreting the empirically estimated indifferencetax factors, the right hand sides of the various models are considered which represent thetheoretically estimated indifference tax factors. These estimates do not significantly dif-fer between the models for a seller with and without discounting. The model for a long-

term buyer with discounting lowers the theoretically estimated indifference tax factors.

III.B. Short-term trading

Short-term traders transact in the stocks because of the dividends, as opposed to other in-vestors who are interested in the stock as part of a longer-term strategy. Short-term trad-ers plan on holding the stock only long enough to benefit from the transaction as a resultof their particular tax situation. This holding period varies across investor groups and be-tween countries. If the decline in stock price varies from the dividend amount, short-termtraders with an indifference tax factor of 1.000 will enter the market to obtain arbitrageprofits and will drive the implied ITF towards 1.000. Further, short-term trading by cor-porate shareholders that prefer dividends to capital gains impacts on the ITF. Due totransactions costs, this process is somewhat hampered and the observed ITF can varyfrom 1.000 even given the activity of short-term traders.

To distinguish between ITFs driven by short-term trading versus those resultingfrom the activities of long-term traders, consistent with the tax-clientele model, volumearound ex-dividend days is investigated [Lakonishok and Vermaelen, 1986, Stickel,1991, Shaw, 1991, and Manakyan et al. 1993]. Evidence of no abnormal volume is con-sistent with the long term trading hypothesis.

Evidence of abnormal volume cannot be so easily interpreted. Campbell and Bera-nek [1955] suggest strategies based on tax circumstances if a transaction is already beingcontemplated. A strict application of such strategies could lead to clustering around the



10/23

ex-date by long-term investors and abnormal volume.7 However, this clustering would be

the result of postponement of activity until the ex-date and acceleration of activity to thecum-date. Therefore, unlike the case where there are short-term traders, the cumulativevolumes for a period around the ex-date should not be abnormal, as other days are ex-pected to exhibit lower than normal volumes in order for the activity to cluster around theex-date.

Short-term traders transact in stocks where the expected profits are greatest. Short-term traders are expected to be more active in stocks with a low relative bid-ask spread,low transaction costs and greater liquidity. These factors are proxied by the logarithm ofprice [Demsetz, 1968, Tinic and West, 1972, Benston and Hagerman, 1974, Branch andFreed, 1977, Edmister, 1978, Walkling and Edmister, 1983, and Stoll and Whaley, 1983],the standard deviation of price [Walkling and Edmister, 1983], and the daily trading value[Demsetz, 1968, Tinic and West, 1972, Benston and Hagerman, 1974, Branch and Freed,

1977, Walkling and Edmister, 1983, and Stoll, 1989].

The hypothesis is that, as liquidity increases, as the price variability decreases,and/or as the relative bid-ask spread decreases, abnormal volume will increase, reflectingthe increased participation of short-term traders. Further, the indifference tax factor is ex-pected to be closer to one as the abnormal volume increases, reflecting short-term tradingactivity.

IV. Hypotheses

This section begins with a discussion of the indifference tax factors (ITFs) for various in-vestor groups calculated from their tax rates. Arbitrage opportunities result from thesedifferential ITFs.8 Then, specific hypotheses are presented which integrate the institu-

tional detail and the theory.

IV.A. Indifference Tax Factors

The ITFs reflect how large a capital gain must be for an investor to be indifferent betweenit and a dividend of one dollar. An ITF less (greater) than 1.0 indicates a preference forcapital gains (dividends). Tables 3 and 4 show the ITFs for individual and corporate in-vestors in the top marginal tax brackets in the United States and Canada respectively for1982 to 1991. In the remainder of this section, unless otherwise specified, individual in-vestors and corporate investors refer to those investors in the top marginal tax brackets.

In the U.S., the lower bounds on ITFs are those of individual investors in the topmarginal tax bracket and the upper bounds are the ITFs of corporations with holdings of

at least 80% in the dividend-paying corporation. However, when ownership levels reach80%, policies are set by the owning corporation and the stock is often thinly traded. Theowner corporation, generally, is not active in the market with respect to this stock and isnot the marginal investor. It is reasonable to assume the upper bounds are the ITFs of cor-porate investors in the top marginal tax bracket.

Individual investors ITFs before 1987 indicate a strong preference for capitalgains. In 1987, the preference is reduced. In 1988 to 1990, the ITFs show indifference be-tween capital gains and dividends. In 1991, as the result of capping the tax on capitalgains, a slight preference for capital gains is restored.



11/23

Corporate investors ITFs indicate a strong preference for dividends over the entire

period. This level of preference increases as the level of ownership goes to at least 20%for years subsequent to 1987 and increases even further as ownership reaches at least80%.

The gap between the ITFs of the individual and corporate investors is approxi-mately 0.67 for 1982 to 1986, 0.54 for 1987 and 0.36 for 1988 to 1991, at the federallevel. Introducing state taxes results in a widening of the gap. With combined federal andNew York taxes, the gap is as wide as approximately 0.94 for 1982 to 1986. Over thesame period, considering California taxes, the spread is approximately 0.80.

In Canada, the ITFs for the individual and corporate investors represent the ex-treme ranges of ITFs for 1982 to 1989. For 1990 and 1991, the lower boundaries are 1.00,the ITFs of investors who are either tax-exempt or pay taxes on dividends and capital

gains at the same tax rate.

Individual investors in the top marginal tax bracket are indifferent between the re-ceipt of a dividend of one dollar or a capital gain of one dollar during the period 1982 to1986 inclusive. In the years 1987 to 1989, a slight preference is indicated for capital gainsby these investors and in the final years of study, 1990 to 1991, a slight preference is indi-cated for dividends. Individual investors in lower marginal tax brackets prefer dividendsin all years. The disparity between the ITFs of individual investors in the top marginal taxbracket and those in lower marginal tax brackets decreases over the years.

Corporate investors prefer dividends from a Canadian corporation to capital gainsfor the entire period. The gap between the ITFs of individual and corporate investors isapproximately 0.23 for 1982 to 1986, 0.30 for 1987 and 0.25 for 1988 to 1991 at the fed-

eral level. Using a combined federal and Ontario tax rate, the gap is approximately 0.35for 1982 to 1986, 0.48 for 1987 and 0.43 for 1988 to 1991. A combined federal and Al-berta rate leads to similar results.

The differences between the ITFs of the different investor groups create the possi-bility of arbitrage opportunities, commonly referred to as dividend capture programs. In-vestors will engage in arbitrage opportunities to the point where the costs equal theprofits. The introduction of transactions costs raises the price decline required by short-sellers and reduces the price decline required by purchasers. If short-term trading doesoccur, it will be in stocks with low relative bid-ask spreads, low transaction costs andhigh liquidity.

IV.B. Specific Hypotheses

Hypothesis 1: The indifference tax factor is positively related to the dividendyield. As the dividend yield increases, the indifference taxfactor increases. Higher-yielding stocks are held by investorswith a preference for dividends as a result of preferential taxtreatment on those.

The null hypothesis: Investors ignore dividend yield and select portfolios that areefficient on a before-tax basis. Risk cannot be held constant inthe process of altering portfolios for higher after-tax returns.



12/23

No difference exists in the indifference tax factor for different

dividend yields.

Hypothesis 2: The ITFs comparing Canada and the U.S., where there is noevidence of short-term trading, are different for each of theyears 1982 to 1986 inclusive, and not different for the years1987 to 1991 inclusive.

Hypothesis 3: The ITFs oninterlisted stocksare not differentfromthose intheU.S. regardless of the country of incorporation. This would beconsistent with the marginal investor for Canadian stocksinterlisted on a U.S. exchange being a U.S. resident taxpayer.

V. Data

Common stocks that pay cash dividends, ordinary and/or extraordinary, with ex-dividenddates after January 2, 1982 and before January 1, 1991 and are listed on the NYSE, theAmex or the TSE represent the entire potential sample. If a stock is listed on the TSE andis interlisted on the NASDAQ or any U.S. exchange but not the NYSE or Amex for someperiod, it is excluded from the sample over that period. Any common stocks where the is-suer is not incorporated in Canada or in the United States are separately identified.

The data files from the Center for Research in Security Prices (CRSP) are the pri-mary source of data for the NYSE, Amex and all interlisted stock listings. The data filesfrom the Canadian Financial Markets Research Center (CFMRC) are used for the TSElistings.

If a firm has an ordinary and an extraordinary cash dividend paid on the same ex-date, the two dividends are added together and treated as one dividend distribution. Divi-dends reported in foreign currencies are converted to the currency of the market using theexchange rate for large transactions as reported in the Federal Reserve bulletin.

If there is another distribution event, such as a stock dividend, stock split, or spin-off, on the same date or within twenty trading days of the cash dividend ex-date, that ex-date is excluded from the sample for that firm, to remove coincident events which may af-fect the valuation of the firms stock or its trading volume.

If there is no valid transaction price on the ex-date or on the cum-date, that observa-tion is dropped from the sample. Although CRSP reports a return in such cases, the returnis based on the average of the bid and the ask price, which may not be representative of a

transaction price. If there is insufficient data for estimating the market model parameters,the observation is excluded from the sample.

All of the cash dividend distributions are identified for the three exchanges. TheNYSE, Amex and TSE firms identified as distributing cash dividends are coded to iden-tify their status based on country of incorporation and exchange listing. There are ninepossible circumstances based on primary listing location (which coincides with countryof incorporation)/secondary listing location: exclusively NYSE (36,058 observations),NYSE/TSE (1,171), Other Foreign/NYSE (241), exclusively Amex (7,881), Amex/TSE(7), Other Foreign/Amex (101), exclusively TSE (5,413), TSE/NYSE (550), and



13/23

TSE/Amex (441). The sample of NYSE and Amex listed stocks, including interlisted

stocks, is 46,450 observations and the TSE sample is 5,413 observations.

VI. Methodology

The indifference tax factors computed on ex-dividend dates are hypothesized to be due tothe different marginal tax rates on dividend income and capital gains (losses). In general,the ITF is computed as

P P

D

t

t

X X d

c

- -=

-

-1

1

1

$

(5)

where td is the marginal tax rate on dividends,

tc is the marginal tax rate on capital gains,

PX-1is the closing price of the stock on the cum-day, the day prior to goingex-dividend,

$PX

is the closing price on the ex-dividend date,9 adjusted for the market re-

turnsas discussed below, and

D is the value of the cash dividend distributed on the dividend pay date.

This study adjusts the closing prices using a risk adjusted market model:

$

{ ( )}P P

R R RXX

f i M f

=+ + -1 b

(6)

where PX is the closing price on the ex-date,

RM is the return to the market on the ex-date,

bi is the systematic risk on stocki estimated over the estimation period, and

Rf is the daily return on 90 day Treasury bills for the U.S. or Canada, depend-ing

on the exchange, adjusted from a discount basis.

This adjustment results in a negative return in some cases where the market dropsovernight but begins with the assumption of positive expected returns.

The return to the equally weighted CRSP index, including dividends, is used forstocks trading on the NYSE or Amex for RM. The return to the TSE 300 index, includingdividends, as computed by the CFMRC, is used for for non-interlisted stocks on the TSE.The market returns are with dividends, since the stock of interest is accruing the dividendbetween ex-dividend dates. If market returns without dividends are used, the market re-turns would be understated, since the value of stocks drops on the ex-dividend day, bias-ing the market returns down.



14/23

For observations from the CRSP files, bi is computed using the methods developed

in Scholes and Williams [977) to adjust for nonsynchronous trading. For observationsfrom the CFMRC files, bi is that calculated by CFMRC.

The estimation period is the interval beginning (ending) 60 trading days before (af-ter) the ex-dividend date. If there is a cash dividend distributed within this period, thenthe beginning (ending) date is two trading days after (before) this prior (subsequent) dis-tribution.10 The ex-dividend date and the two prior and the five subsequent trading daysare excluded in all cases. The maximum estimation period for a stock is 113 days. Thefive subsequent trading days are excluded in order that the days up to and including therecord date are excluded. The possibility of special settlements creates the necessity forthis. If there is no valid closing price available for a day, that day and the subsequent dayare also excluded. The returns for both these days are computed based on the average ofthe closing bid and ask prices, not on closing transaction prices and as such may be inac-

curate. Eliminating such data ensures that the actual returns data used are based on tradedata only.

If less than 40 valid returns are available during the estimation period, that observa-tion is excluded. If more than 5 of the 11 trading days centered on the ex-date lack validprices, that observation is excluded.

VI.A. Adjustment for Heteroscedasticity

The ITFs, as computed, are unbiased and normally distributed with variance conditionalon the variance of the prices for each firm over the estimation period, the amount of thedividend and the expected return to the stock. As developed in Michaely [1991], the vari-ance of the ITFs is conditional on the dividend yield (see Michaely, Appendix A, page

857) and the variance of the returns over the estimation period. The slight difference inthe two approaches arises from the assumption as to what the stochastic variable is. Mi-chaely assumes the returns are uncertain, while this paper uses the ex-date price as the un-certain variable, from which the uncertain return is derived. Also, this paper adjusts theex-date price for the expected overnight return on the stock.

To control for the conditional heteroscedasticity and to obtain efficient estimatorsof the ITFs, generalized least squares is used where the mean ITFs are weighted by thevariance of the prices and inversely weighted by the dividend and one plus the expectedreturn. The mean ITF for a portfolio of firms and ex-dividend dates is estimated by

ITFITF

D E R

D E R

i

Pi

i i

Pj

j jj

N

=

+

+=

s

s2

2

2

2

1

1

1

{ ( [ ])}

{ ( [ ])}*

*=i

N

1

(7)

where sPi

2 is the variance of the price of stock i over the estimation period,

Di

* is the discounted value of the dividend on stocki from the pay-date to the

cum-date using the daily return on 90 day T-bills for the U.S. or Canada,and

E[Rj] is the expected return on stocki.11



15/23

The result is GLS estimates of the ITFs for the portfolios of firms and dates. Gag-

non and Suret [1991] find that the power of the models used in prior research is inade-quate to find significant results, since the samples are often small. By using GLS, thepower of the tests is improved and their concern is addressed.

The entire sample is divided into quintiles by dividend yields. This results ingroups of less than equal size by year or exchange but allows for comparability across ex-changes and years.12 Many studies have reported their findings by deciles but the use ofquintiles increases cell sizes and still allows for comparison of results to those of prior re-search. The GLS estimates of ITFs are compared by quintiles. This approach is similar tothat of previous research.

VII. Results

The conclusions are structured to follow the hypotheses developed in Section IV. Also,when the results differ based on the country of incorporation or exchange listing, this isnoted. Unless otherwise specified, the two methods have similar results and the resultsare similar across listing types and countries of incorporation.

Hypothesis 1: The indifference tax factor is positively related to the dividend yield.Due to the clientele effect, as the dividend yields increase the indifference tax factors in-crease. Using GLS, Hypothesis 1 is supported for U.S. non-interlisted stocks (Table 5,rows NYSE/NYSE and Amex/Amex). Hypothesis 1 is not supported for TSE non-interlisted stocks (Table 5, row TSE/TSE). In addition, using GLS, the null hypothesisthat the mean ITFs equal 1.0, is rejected for U.S. non-interlisted stocks but cannot be re-jected for TSE non-interlisted stocks. The ITFs are consistent with the ITFs calculated inTables 3 and 4.

Using regression, Hypothesis 1 is supported (Table 6). The natural logarithm ofdividend yield is significantly positively related to the indifference tax factor over all ob-servations.13 However, it is found upon further examination of the observations from theCRSP files that the quintile with the lowest yield generates a significantly different modelthan the top four yield quintiles. In fact, in this quintile, yield is negatively related to theindifference tax factor. Low dividend stocks as opposed to low yield stocks are excludedin some prior research.

Hypothesis 2, that indifference tax factors, where there is no evidence of short-termtrading, are different for U.S. and Canadian incorporated non-interlisted firms, is sup-ported. The null hypothesis, that they are equal, is rejected at the 5 percent level of confi-

dence. See Table 5, rows T/T = N/N and T/T = A/A which compares the ITFs for stockswhich are only listed on the TSE with stocks that are only listed on the NYSE or theAmex respectively.

Hypothesis 3, that the indifference tax factors for interlisted stocks are equal tothose in the U.S., cannot be rejected at the 5 percent level of confidence using GLS. Us-ing regressions, we conclude that the country of incorporation significantly affects theobserved indifference tax factors for stocks listed on the NYSE, while firms traded on theAmex demonstrate no significant difference, despite different countries of incorporation(Table 6, row TSE/NYSE and row TSE/Amex).



16/23

In conclusion, the indifference tax factors, calculated based on ex-dividend day be-havior of common stocks, demonstrate some behavior consistent with a tax effect and arereasonable compared to the theoretical indifference tax factors developed in Section IV.However, some of the differences in indifference tax factors seem to be attributable tocauses other than taxes. Canadian firms interlisted on the NYSE or Amex have ex-dividend day behavior consistent with U.S. incorporated NYSE or Amex firms, respec-tively. This suggests that the marginal investor for Canadian firms is a U.S. investor if thestocks are listed on a U.S. exchange.


Table 5: Mean ITFs by Primary Listing/Secondary Listing and Probabilities the Mean ITFs are

Equal

Primary/SecondaryListing

Yieldq 1 Yieldq 2 Yieldq 3 Yieldq 4 Yieldq 5

Mean ITFs

TSE/NYSE 1.183 .467 .840 .932 .908

NYSE/NYSE

1.023 .749 .806 .863 1.108

NYSE/TSE .996 .518 .836 .921 1.031

TSE/TSE .076 .588 .483 .443 .668

TSE/Amex .364 1.132 .603 .797 1.195

Amex/Amex

.890 .830 .861 .880 .993

Probabilities

N/T=N/N .9210 .4266 .8743 .7419 .6636

T/N=N/N .5741 .3646 .9061 .8082 .5626

T/A=A/A .1341 .3375 .3512 .8098 .7110

N/T=T/N .6319 .9038 .9924 .9750 .7480

T/N=T/A .0659 .1263 .5404 .7573 .6509

T/T=N/N .0001 * .0991 .0015* .0001* .0001 *

T/T=A/A .0001 * .0351 * .0024 * .0006* .0236 *

N/T=T/T .0015* .8170 .0928 .0142* .0629

T/N=T/T .0002 * .7071 .2294 .0968 .4993

T/A=T/T .4248 .0883 .6703 .3081 .3299

Since there are only 7 observations available for Amex/TSE, it is not presented.For example: T/N=N/N shows the probability that the ITF for the TSE/NYSE equals the ITF for the

NYSE/NYSE. * Significant at a 5 percent level of confidence.


17/23

VIII. Summary and Conclusions

Evidence is found of a tax clientele effect in that, as the dividend yields increase, the in-

difference tax factors increase. This result is consistent with the Elton and Gruber propo-sition that the marginal investor can be inferred by examining ex-dividend day behavior.However, the tax changes of 1986 do not lead to the hypothesized change in the indiffer-ence tax factors in the U.S.

The indifference tax factors for non-interlisted stocks are different on all three ex-changes. This is consistent with each exchange having different marginal investors. How-ever, Canadian firms interlisted on the NYSE or Amex have ex-dividend day behaviorconsistent with U.S. incorporated NYSE or Amex listed firms, respectively. This sug-gests that the marginal investor for Canadian firms listed on a U.S. exchange is a U.S. in-


Table 6: Regression Results: Incorporation and Exchange Listing

Intercept No Intercept

Intercept 1.0897(31.389)

ln (Yield) 0.05701(8.219)

0.05701(8.219)

Abnormal Volume 0.00333(13.926)

0.00333(13.926)

TSE/NYSE -0.09372(-2.148)

0.99596(20.750)

TSE/Amex 0.07883(1.152)

1.16851(14.518)

NYSE/TSE 0.07904(2.096)

1.16872(25.664)

NYSE/NYSE 1.23524(44.277)

Amex/Amex 0.05691(2.108)

1.14659(39.432)

Foreign/NYSE -0.35042(-3.415)

0.73926(6.077)

Foreign/Amex 0.08380(1.494)

1.17348(18.236)

Adjusted R2

NSSETSSF-Statistic

0.009437154

42841.9866343257.30348

45.011

0.540037154

42841.9866393153.89181

4846.844

The dependent variable is the estimated ITF for each observation. Each cell contains the estimatedcoefficient and the t-statistic that the coefficient could be zero. For the model with an intercept, the stockswith their home market as NYSE and trading on NYSE are used as the No Dummy case. The coefficientsshow the difference from the No Dummy observations. The R2 , F-statistic and TSS for the two modelsare not comparable since the No Intercept model is uncentered.


18/23

vestor. It appears that while domestic tax policy has some impact on ex-dividend day

behavior, it is not the only variable with an impact.

For a corporation making dividend policy decisions, it is necessary to consider thetax position of the shareholders. A firm that makes a dividend decision inconsistent withits shareholder clienteles tax position will cause considerable turnover in its sharehold-ers. To complicate matters, a corporation cannot assume that its shareholder clientele areresidents of the country of incorporation. Where a corporation has significant non-resident shareholders, their tax position must also be considered.

Future research might investigate the reason for the significant difference betweenthe ex-dividend day behavior of NYSE and Amex listed stocks.

Acknowledgements

The authors gratefully acknowledge the helpful suggestions received when an earlier ver-sion of this paper was presented at the 2nd Annual Conference on Multinational FinancialIssues. We gratefully acknowledge the suggestions and comments of participants atworkshops at Lehigh University and at the University of Mississippi.



19/23

Endnotes

1. In this paper, interlisted refers to stocks that are incorporated in either Canada or theU.S., listed on an exchange in the country of incorporation and also listed on an exchangein the other country. Interlisted stocks account for 28.2%, 13.3% and 4.6% of the tradingvolume per year respectively over the period, 1982 to 1991, on the TSE, Amex andNYSE respectively.

2. McKenzie and Mintz [1992] Tax Effects on the Cost of Capital in Canada-U.S. TaxComparisons, Chicago: University of Chicago Press, p.189.

3. The term short-term trading refers to trading for dividend capture and is unrelated tothe tax code that defines short-term versus long-term trading for tax purposes.

4. No stocks are interlisted between the NYSE and Amex.

5. The dividends received deduction refers to the portion of dividends received by a U.S.corporation that is excluded from taxation.

6. Canada uses a modified imputation tax system to reduce the impact of double taxationon dividend distributions to individuals. Dividends are paid from corporate income onwhich taxes have already been levied but individuals are allowed a tax credit on dividendincome to offset the corporate taxation on the dividends paid.

7. Stickel [1991] p.48 states Incentives for long-term traders to time their trades and forshort-term traders to capture dividends both increase with dividend yield. Thus, a positiverelation between ex-day abnormal volume and dividend yield cannot establish the exis-tence of dividend capture.

8. Heath and Jarrow [1988] correctly point out that the term arbitrage opportunities is ap-plied loosely in a large amount of the literature on ex-dividend day behavior. A true arbi-trage opportunity involves no risk, which is not true in these cases.

9. Closing prices are used instead of opening prices for consistency and for a valid com-parison to the market returns. See Stickel [1991] for a discussion of the difficulties in us-ing opening prices. Given the exchange rules regarding the adjustment of limit orders to

buy and stop orders to sell, the use of opening prices may potentially bias the results.

10. Stickel [1991] uses an estimation period 75 days on each side of the ex-dividend date,which will include the adjoining dividend dates, since quarterly dividends are distributedevery 63 trading days, on average. Michaely [1991] uses an estimation period 25 days oneach side of the ex-dividend date, which is smaller than used here.

11. E [Ri] is computed as Rt +bi (E[RM]-Rf) where the E[RM] is estimated to be 0.00048per calendar day.



20/23

12. Shifts occur in these averages over time as a result of inflation, growth and institu-

tional changes. Papaiannou and Savarese [1994] document changes in corporate divi-dends as a result of the 1986 TRA. These changes result in a shift in average dividendyields based on quintiles: the average dividend yield in the top quintile is not necessarilythe same in 1988 as in 1986. The use of quasi-quintiles developed on the basis of the ac-tual quintiles for the entire period 1982 to 1991, results in groups of different size for dif-ferent years but with similar average dividend yields or other variable of interest acrossyears.

13. Testing confirms that the natural logarithm of the dividend yield is a better variablethan using the natural logarithms of price and dividend separately.



21/23

References

Athanassakos, George. Tax induced trading volume around ex-dividend days under dif-ferent tax regimes: The Canadian Experience 1970-1984. Journal of Business Financeand Accounting23(4), 1996, 557-584.

Bailey, Warren. Canadas Dual Class Shares: Further Evidence on the Market Valuationof Cash Dividends. Journal of Finance 43(5), 1988, 1143-1160.

Bali, Rakesh, and Hite, Gailen L. Ex dividend day stock price behavior: discreteness ortax-induced clienteles? Journal of Financial Economics 47(2), 1998, 127-159.

Barclay, Michael J. Dividends, Taxes, and Common Stock Prices: The Ex-Dividend DayBehavior of Common Stock Prices before the Income Tax. Journal of Financial Econom-

ics 19(1), 1987, 31-44.

Bartholdy, Jan, and Brown, Kate. Ex-dividend day pricing in New Zealand. Accountingand Finance 39(2), 1999, 111-112.

Benston, G.J. and Hagerman, E.L. Determinants of Bid-Ask Spreads in the Over-the-Counter Market. Journal of Financial Economics 1, 1974, 353-364.

Booth, L. D. and Johnston, D. J. The Ex-Dividend Day Behavior of Canadian StockPrices: Tax Changes and Clientele Effects. Journal of Finance 39(2), 1984, 457-476.

Branch, B. and Freed, W. The Impact of Option Listing on the Price and Volume of theUnderlying Stock. Financial Review 16, 1977, 1-15.

Campbell, James A. and Beranek, William. Stock Price Behavior on Ex-Dividend Dates.Journal of Finance 10(4), 1955, 425-429.

Dempsey, Mike. Investor tax rationality and the relationship between dividend yieldsand equity returns: An explanatory note. Journal of Banking and Finance 25(9), 2001,1681-1686.

Demsetz, H. The Cost of Transacting. Quarterly Journal of Economics 82, 1968, 33-53.

Dubofsky, David A market microstructure explanation of ex-day abnormal returns. Fi-nancial Management21, 1992, 32-43.

Dubofsky, David, and Kannan, Srinivasan. Hedged dividend capture and ex-day returns:an empirical update. Journal of Business Finance and Accounting 20(5), 1993, 725-735.

Durand, David. and May, Alan M. The Ex-Dividend Behavior Of American TelephoneAnd Telegraph Stock. Journal of Finance 15(1), 1960, 19-31.

Edmister, Robert O. Commission Cost Structures: Shifts and Scale Economies. Journalof Finance 33, 1978, 477-486.

Elton, Edwin J. and Gruber, Martin J. Marginal Stockholder Tax Rates and The ClienteleEffect. Review of Economics and Statistics 52(1), 1970, 68-74.



22/23

Frank, Murray, and Jagannathan, Ravi. Why do stock prices drop by less than the value

of the dividend? Evidence form a country without taxes. Journal of Financial Economics47(2), 1998, 161-188.

Gagnon, Jean-Marie and Suret, Jean-Marc. Ex-Dividend Day Price Changes and ImpliedTax Rates: An Evaluation. Journal of Financial Research 14(3), 1991, 255-262.

Grammatikos, Theoharry. Dividend Stripping, Risk Exposure, and The Effect of the 1984Tax Reform Act on the Ex-Dividend Day Behavior. Journal of Business 62(2), 1989,157-174.

Han, Ki C. The effect of the 1986 Tax Reform Act on ex-dividend day return behavior.Journal of Financial Research 17(2), 1994, 175-185.

Heath, David C. and Jarrow, Robert A. Ex-Dividend Stock Price Behavior and ArbitrageOpportunities. Journal of Business 61(1), 1988, 95-108.

Kalay, Avner. The Ex-Dividend Day Behavior of Stock Prices: A Re-Examination of theClientele Effect. Journal of Finance 37(4), 1982, 1059-1070.

Kalay, Avner. The Ex-Dividend Day Behavior of Stock Prices: A Re-Examination of theClientele Effect: A Reply. Journal of Finance 39(2), 1984, 557-561.

Karpoff, Jonathan M. and Walkling, Ralph A. Short-Term Trading around Ex-DividendDays: Additional Evidence. Journal of Financial Economics 21(2), 1988, 291-298.

Karpoff, Jonathan M. and Walkling, Ralph A. Dividend Capture in NASDAQ Stocks.

Journal of Financial Economics 28(1/2), 1990, 39-66.Koski, Jennifer. A microstructure analysis of ex-dividend stock price behavior beforeand after the 1984 and 1986 tax reform acts. Journal of Business 69, 1996, 313-338.

Koski, Jennifer, and Scruggs, John T. Who trades around the ex-dividend day? Evidencefrom NYSE audit file data. Financial Management27(3), 1998, 58.

Lakonishok, Josef and Vermaelen, Theo. Tax Reform and Ex-Dividend Day Behavior.Journal of Finance 38(4), 1983, 1157-1179.

Lakonishok, Josef and Vermaelen, Theo. Tax-Induced Trading around Ex-DividendDays. Journal of Financial Economics 16(3), 1986, 287-319.

Lasfer, M. Ameziane Ex-Day Behavior: Tax or Short-Term Trading Effects. Journal of Finance 50(3), 1995, 875-897.

Liljeblom, Eva, Loflund, Anders and Hedvall, Kaj. Foreign and domestic investors andtax induced ex-dividend day trading. Journal of Banking and Finance 25(9), 2001,1687-1716.

Manakyan, Herman, Liano, Kartono and Huang, Gow Cheng. The 1986 Tax Reform Actand Ex-Dividend Day Price and Volume Patterns: Evidence from Organized Exchangesand The OTC Market. Journal of Economics and Finance 17(1), 1993, 135-148.



23/23

McKenzie, Kenneth J. and Mintz, Jack M. Tax Effects on the Cost of Capital. In

Canada-U.S. Tax Comparisons, ed. Shoven, John B., and Whalley, John. Chicago: Uni-versity of Chicago Press, 1992, 189-216.

Menyah, Kojo. Ex-dividend equity pricing under UK tax regimes. Journal of BusinessFinance and Accounting20(1-2), 1993, 61-81.

Michaely, Roni. Ex-Dividend Day Stock Price Behavior: The Case of the 1986 Tax Re-form Act. Journal of Finance 46(3), 1991, 845-860.

Miller, Merton H. and Scholes, Myron S. Dividends and Taxes: Some Empirical Evi-dence. Journal of Political Economy 90(6), 1982, 1118-1141.

Naranjo, Andy, Nimalendran, M., and Ryngaert, Mike. Time Variation of Ex-Dividend

Day Stock Returns and Corporate Dividend Capture: A Reexamination. Journal of Fi-nance 55(5), 2000, 2357-2372.

Papaioannou, George J. and Savarese, Craig M. Corporate Dividend Policy Response tothe Tax Reform Act of 1986. Financial Management23(1), 1994, 56-63.

Robin, Ashok J. The Impact of the 1986 Tax Reform Act on Ex-Dividend Day Returns.Financial Management 20(1), 1991, 60-70.

Scholes, Myron and Williams, Joseph. Estimating Betas from Nonsynchronous Data.Journal of Financial Economics 5, 1977, 309-327.

Shaw, Wayne H. An Examination of Ex-Dividend Day Stock Price Movements: TheCase of Nontaxable Master Limited Partnership Distributions. Journal of Finance 46(2),1991, 755-776.

Siddiqi, Mazhar. Ex-dividend returns and the Tax Reform Act of 1986. The Financial Re-view 32(1), 1997, 71-86.

Skinner, David Lynn. Twenty-five years of tax law changes and investor response. Jour-nal of Financial Research 16(1), 1993, 61-70.

Stickel, Scott E. The Ex-Dividend Behavior of Nonconvertible Preferred Stock Returnsand Trading Volume. Journal of Financial and Quantitative Analysis 26(1), 1991, 45-62.

Stoll, Hans R. Inferring the Components of the Bid-Ask Spread: Theory and EmpiricalTests. Journal of Finance 44, 1989, 115-134.

Tinic, Seha M. and West, Richard R. Competition and the Pricing of Dealer Service in theOver-the-Counter Stock Market. Journal of Financial and Quantitative Analysis 7(3),1972, 1707-1727.

Walkling, Ralph A. and Edmister, Robert O. Are There Commission Cost Side-effectsfrom Portfolio Management Decisions? Financial Analysts Journal July/August, 1983,52-59.


Harmonization of International Taxation

Documents

Transcript of Harmonization of International Taxation