Evidence of ex-dividend trading by investor tax category

Abstract

This paper investigates the identity of the ex-dividend date traders using the Finnish unique database that records the trades of all investors on the market. We find evidence of two investor groups trading around the ex-dividend date: domestic non-financial investors doing dividend capturing arbitrage and foreign investors together with domestic financial institutions doing mainly the opposite. We report significant deviations from neutral buy probabilities for these investor groups around the ex-dividend date, deviations that are in line with their taxational characteristics. While a part of the trading can be characterized as dividend clientele trading, we also found arbitrage activity by some investors. Evidence of the arbitrage activity being more severe for high-yield stocks was also found. In terms of tax revenues lost, the economic importance of the short-term arbitrage activity seems to be minor.

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