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Historical stock prices have long been used to evaluate a stock’s future returns as well as the risks associated with those returns. Similarly, historical dividends have been used to evaluate the intrinsic value of a stock using, among other methods, a dividend discount model. In this chapter, we propose an alternate use of the dividend discount model to enable an investor to assess the risks associated with a particular stock based on its dividend history. In traditional applications of the dividend discount model for stock valuation, the value of a stock is the net present value of its future cash dividends. We propose an alternative approach in which we calculate the internal rate of return for a stream of future cash dividends assuming the current stock price. We use a bootstrapping approach to generate a stream of future cash dividends, and use a Monte Carlo simulation approach to run multiple trials of the model. The probability distribution of the internal rates of return obtained from the simulation model provides an investor with an expected percentage return and the standard deviation of the return for the stock. This allows an investor to not only compare the expected internal rates of return for a group of stocks but to also evaluate the associated risks. We illustrate this internal rate of return approach using stocks that make up the Dow Jones Industrial Average.

This paper aims to explore the potential use of a dividend capture strategy by individual investors. This strategy arises from the 2003 tax law changes which lowered tax rates on dividends received, while leaving the short‐term tax rates on capital losses unchanged. In addition, leverage can be used in combination with an aggressive call‐writing strategy to receive a multiple of the tax‐advantaged dividend yield without a corresponding increase in risk.

In addition to illustrating how the dividend capture strategy works, a new method of comparing returns between strategies is developed. This method does not rely on a particular risk‐return model, such as is used by the Sharpe ratio or Jensen's alpha methodologies. Finally, a formula is derived which computes the borrowing (margin loan) rate that makes the aggressive call‐writing strategy profitable.

The 2003 changes in US tax laws provide individuals with an opportunity to apply dividend capture techniques similar to those which have been available to corporations for many years. However, corporations use dividend capture techniques to lower risk, while individuals require risk exposure to keep the possibility for capital gains. Thus, a method is developed for capturing an enhanced tax refund on the drop in stock price caused by the stock going ex‐dividend without giving up the potential for capital gain. A byproduct of this method is a straightforward means to measure risk‐adjusted returns for the covered call strategy. The aggressive call‐writing strategy described in this paper is found to offer enhanced returns without an increase in risk for those in the top individual tax brackets.

The specific level of additional risk‐adjusted returns available depends on the tax rates and interest (margin loan) rates facing the investor.

Following the 2003 tax law changes, individuals can receive returns on stocks higher than implied by the statutory tax rate on dividends by employing a dividend capture strategy which involves writing call options on dividend‐paying stocks. This paper also demonstrates that the risk exposure necessary to obtain full capital gains potential can be maintained with an aggressive strategy. This strategy inherently provides a method to judge the extent of improvement without having to rely on questionable assumptions of any specific asset‐pricing model.

The paper provides an alternative to conventional covered call‐writing strategies which reduce exposure to capital gains. Individual investors and their advisors will find a method to maintain exposure to market risk and therefore the full potential for capital gains, while receiving preferential tax treatment on dividends received. Researchers will find a method to directly compute risk‐adjusted return for covered call‐writing strategies without having to rely on assumptions made in the asset‐pricing models underlying the Sharpe ratio and Jensen's alpha.

This study investigates the ex-dividend day stock prices of the firms listed on the Dhaka Stock Exchange (DSE) where the tax rate is higher on dividends than on capital gains. The results help to explain what impact taxes have on the ex-day stock prices behavior in an emerging market.

To examine the tax effect on the ex-day stock prices behavior, this study considers after-tax dividends and computes the raw price ratio, market-adjusted price ratio, raw price drop, market-adjusted price drop. The market-adjusted ex-dividend day abnormal returns and relative trading volume are also examined to determine the direction of investor trading around the ex-day.

The main hypotheses examine whether the mean (median) differs from its theoretical value by using a t-test and nonparametric sign-rank test. The findings suggest that the drop of stock prices on the ex-day on the DSE is not due to taxes or transaction costs but to valuation assumptions made by investors in determining the equilibrium stock price.

Findings of this study will be useful for investors and traders in their valuation assumption to trade around the ex-dividend day.

Market participant’s preference of dividends, and exempted tax and its ultimate contribution to the equity value explain the ex-day stock prices behavior in the Dhaka Stock Exchange.

This paper explores dividend announcements based on information hypothesis. We explore in particular whether or not information signaling theory existed in Taiwan. We also explore the free cash flow hypothesis. In order to eliminate affecting factors, we target companies with irregular dividends as research samples, just like those with specially designated dividends (SDD). We examine whether or not those proceeds may be deemed as future earnings prospection. In this paper we study mainly dividend announcements made during stockholder’s meetings of the companies listed in the Taiwan Stock Exchange (TSE) or R.O.C. Over-the-Counter Securities Exchange (ROSE). We apply event study as means of analyzing abnormal returns of the companies. In addition we use the GARCH model with traditional ordinary least square to estimate the market model. The results indicate that SDDs are considered positive signals by the national exchange, TSE. In addition, we also show that the first-time SDD does transmit a positive signal to the market regarding the firm’s future cash flow, and that the SDD of no payment in the previous three years is negative. Furthermore, we prove that low Q firms have greater market reaction than high Q firms in announcement period. The free cash flow hypothesis and firm size effects could not be verified in Taiwan.

Several studies have observed that stocks tend to drop by an amount that is less than the dividend on the ex-dividend day, the so-called ex-dividend day anomaly. However, there still remains a lack of consensus for a single explanation of this anomaly. Different from other studies, this dissertation attempts to answer the primary research question: how can investors make trading profits from the ex-dividend day anomaly and how much can they earn? With this goal, I examine the economic motivations of equity investors through four main hypotheses identified in the anomaly's literature: the tax differential hypothesis, the short-term trading hypothesis, the tick size hypothesis, and the leverage hypothesis.

While the U.S. ex-dividend anomaly is well studied, I examine a long data window (1975–2010) of Thailand data. The unique structure of the Thai stock market allows me to assess all four main hypotheses proposed in the literature simultaneously. Although I extract the sample data from two data sources, I demonstrate that the combined data are consistently sampled. I further construct three trading strategies – “daily return,” “lag one daily return,” and “weekly return” – to alleviate the potential effect of irregular data observation.

I find that the ex-dividend day anomaly exists in Thailand, is governed by the tax differential, and is driven by short-term trading activities. That is, investors trade heavily around the ex-dividend day to reap the benefits of the tax differential. I find mixed results for the predictions of the tick size hypothesis and results that are inconsistent with the predictions of the leverage hypothesis.

I conclude that, on the Stock Exchange of Thailand, juristic and foreign investors can profitably buy stocks cum-dividend and sell them ex-dividend while local investors should engage in short sale transactions. On average, investors who employ the daily return strategy have earned significant abnormal return up to 0.15% (45.66% annualized rate) and up to 0.17% (50.99% annualized rate) for the lag one daily return strategy. Investors can also make a trading profit by conducting the weekly return strategy and earn up to 0.59% (35.67% annualized rate), on average.

The purpose of this paper is to examine preferences of Chinese individual and institutional investors to cash dividends and stock dividends. Using categorized daily holding information from the TOPVIEW database, the authors test how percentage holdings of individuals and institutional investors change, respectively, around annual report dates and registration dates.

The results show that individuals and institutional investors often express heterogeneous preferences to dividends. After controlling for firm size and market performance, the authors find that the higher the ratio of stock dividend is, the more likely institutional investors will increase their overall holdings of the stock-dividend-paying firm in the week after annual report date, but they do not prefer to do so around registration dates. Meanwhile, the higher the ratio of stock dividend is, the more likely individual investors will increase their overall holdings of the stock-dividend-paying firm in the week before registration date, but do not prefer to do so after annual report dates. Such patterns do not exist for cash-dividend-paying firms.

The results imply that different types of investors chase high stock-dividend-paying firms at different stages of dividend events. The findings are consistent with the hypothesis of “price illusion,” but do not lend support to the signaling hypothesis of stock dividends.

This paper uses categorized data of daily share holdings to test how different types of minority shareholders respond to stock dividends and cash dividends for the first time. It sheds lights on the on-going academic debate about the “stock dividend puzzle” in China.

The fact that stocks going ex‐dividend decline in price by less than the dividend amount is theoretically attributed to the differential taxation of dividend and capital gains or the differential taxation of investor groups. NYSE, Amex and Toronto Stock Exchange listed stocks, and stocks interlisted on these three exchanges, are examined to infer the tax jurisdiction of the marginal investor. The stock price changes relative to the dividends are consistent with a tax clientele effect. Further, the stock price changes are plausible given the tax rates. Ex‐dividend day behavior is different for non‐interlisted stocks on all three exchanges, suggesting each exchange has a different tax clientele. Canadian firms interlisted on US exchanges exhibit ex‐dividend day behavior consistent with the appropriate US exchange’s non‐interlisted stocks, suggesting that the marginal investors in these stocks are American.

The purpose of this paper is to examine whether stock dividend announcements create value for companies traded on the Nigerian stock market and to ascertain the nature of the information such announcements convey.

A standard event study methodology, employing the market model, is applied to determine the abnormal returns both on and surrounding the stock dividend announcement date. A sample is broken down based on the timing of announcements and on the frequency with which the announcing companies' shares are traded. The authors also examine the information content of stock dividends by applying the χ² technique to test the level of association between earnings, cash dividends and stock dividends.

The findings suggest that companies that choose their own announcement date outside the Nigerian stock exchange announcement window experience positive abnormal returns if their stock is more frequently traded and negative abnormal returns if their stock is less frequently traded. In addition, support is found for both the cash substitution hypothesis and the signalling hypothesis as explanations for the information stock dividends convey to shareholders.

The small number of companies in the “early announcement” group may not permit a definitive view to be established about the stock market reaction to early stock dividend announcements for this group of companies.

The findings are of practical relevance to researchers, practitioners and investors interested in companies listed on the Nigerian stock market as they reveal the extent to which the shares reflect fundamental information from corporate announcements.

This paper adds to the very limited academic research on the stock market reaction to stock dividend announcements in Nigeria.

Very little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the Nigerian Stock Exchange.

Standard event study methodology, using the market model, is employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal returns are also calculated employing the market-adjusted return model as a robustness check and to test the sensitivity of the results to β estimation. The authors also examine the interaction between cash dividends and earnings by estimating a regression model where announcement abnormal returns are a function of both dividend changes and earnings changes relative to stock price.

The study find support for the signaling hypothesis: dividend increases are associated with positive stock price reaction, while dividend decreases are associated with negative stock price reaction. Companies that do not change their dividends experience insignificant positive abnormal returns. The results also suggest that both dividends and earnings are informative, but dividends contain information beyond that contained in earnings.

The sample for the study includes only cash dividend announcements occurring without other corporate events (such as interim dividends, stock splits, stock dividends, and mergers and acquisitions) during the event study period. The small firm-year observations may limit the validity of generalizations from these conclusions.

The findings are useful to researchers, practitioners and investors interested in companies listed on the Nigerian stock market for their proper strategic decision making. In particular, the results can be used to encourage transparency and good governance practices in the Nigerian stock market.

This paper adds to the very limited research on the stock market reaction to cash dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.

The purpose of this paper is to show how recent capital gains affect ex‐dividend stock pricing. Traditional models assume that investors are motivated to sell a stock before its ex‐date to avoid paying higher taxes on dividends. However, if a stock has appreciated significantly, stockholders have an offsetting incentive to delay the realization of capital gains by continuing to hold the stock in spite of the higher dividend tax rate.

This paper develops a model showing that ex‐dividend price drops should be greater in the presence of larger accrued capital gains. The model was tested by regressing ex‐day pricing measures on the relative size of the recently accrued gain, along with other control variables.

Empirical tests confirm that accrued gains reduce the magnitude of the ex‐day effect, increasing the price drop ratio (ΔP/D) and reducing ex‐day returns. Also documented was that ex‐day price drops are larger for stocks that have recently experienced positive gains, that the observed effect of recent price performance is stronger for higher‐yield stocks, and that share turnover is usually lower for stocks with greater gains.

This paper's findings suggest that the results of existing empirical investigations of ex‐day pricing should be interpreted with some caution, and that future studies should control for gains that occur prior to the ex‐date.

While the tax clientele explanation of ex‐day pricing has been investigated extensively, this is the first study to show how accrued gains and losses impact ex‐dividend price changes.