Arbitrage possibilities on the ex-dividend day

Abstract

In this paper we have investigated the ex-dividend stock price behavior on the Stockholm Stock Exchange to see if there are any arbitrage trading possibilities in connection with the ex-day. Our data sample consisted of all Swedish stocks that paid out a cash dividend during the period 1994-1998 which amounted to 837 observations.

We can conclude that there in fact are arbitrage possibilities since the price correction has on average been less than the dividend paid out. The OTC market is the market where the biggest arbitrage possibilities exist.

In 1994 taxes on dividend were zero and that attracted short-term traders who determined the price setting on the ex-day and therefore the price fall was closer to the dividend. In 1995 the taxes on dividends and capital gains were set equal and as a consequence the price correction ratio was significantly lower which indicates that the price determination was now dominated by long-term investors who trade on other issues than the dividend.

We can also conclude that there was a Clientele Effect on the ex-dividend day in the sense that higher dividend yield stocks attracted more short-term traders than the low dividend yield stocks.

We found no significant differences for the ex-day effect for those companies that that are cross-listed on both the New York Stock Exchange and Stockholm's Stock Exchange compared to those only listed on the Stockholm Stock Exchange.