Odd-Lot Costs and Taxation Influences on Stock Dividend Ex-Dates
30 Pages Posted: 29 Nov 2004
Past research has revealed significant abnormal ex-date returns for stock dividends even though the ex-date is known in advance and the distribution contains no new information. Various researchers have suggested that the higher transaction cost of selling odd-lot share parcels compared to round-lot share parcels is a key driver in the abnormal returns. However, no study to date has directly compared the ex-date price reaction of stock dividends distributed when odd-lot transaction costs were charged to those issued when odd-lot costs were not evident. As odd-lot trade costs were eliminated from the New Zealand Stock Exchange on 1 October, 1991, the New Zealand market provides a unique opportunity to directly test the role, if any, that odd-lot transactions costs have in explaining stock dividend ex-date returns. We find that prior to October 1991 stock dividend ex-dates exhibit significantly positive returns, however, we do not find any significant ex-date return once the higher odd-lot transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex-date price reaction and we find evidence that imputation tax credits have a value greater than zero.
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