Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes

Murray Z Frank, Ravi Jagannathan

Research output: Contribution to journalArticlepeer-review

142 Scopus citations


It is well documented that stock prices on ex-dividend days drop by less than the value of the dividend, on average. This has commonly been attributed to the effect of tax clienteles. We examine data from the Hong Kong stock market, where neither dividends nor capital gains are taxed. As in the U.S., the average stock price drop is less than the value of the dividend; specifically, the average dividend for the period 1980-1993 is HK $0.12 and the average price drop is HK $0.06. We are able to account for this both theoretically and empirically through market microstructure arguments.

Original languageEnglish (US)
Pages (from-to)161-188
Number of pages28
JournalJournal of Financial Economics
Issue number2
StatePublished - Feb 15 1998

Bibliographical note

Funding Information:
A major part of the research described in this paper was done when both authors were also affiliated with the Hong Kong University of Science and Technology (HKUST). Comments from seminar participants at the Georgia Institute of Technology, Indiana University Symposiu, Michigan State University, New York University, Stockholm School of Economics, Tel Aviv University, Yale, York University, University of Texas at Austin, Vanderbilt, The Western Finance Association, and the HKUST conference on corporate finance are appreciated. Larry Harris, Peter Hogfeldt, Richard Green, Roni Michaely, Cliff Smith, Avanidhar Subrahmanyam, Sheridan Titman, Kent Womack and an anonymous referee made very helpful suggestions. We would like to thank Eric Tse for excellent research assistance and the HKUST for research support. Thanks also goes to the SSHRC of Canada for research support to Murray Frank, grant #410-91-0727, and the NSF of U.S.A for research support to Ravi Jagannathan, grant SBR-9409824.


  • Asset Pricing
  • Bid-Ask Spread
  • Dividends
  • G12
  • G35
  • Market Microstructure


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