THE EFFECT OF TAX HETEROGENEITY ON PRICES AND VOLUME AROUND THE EX-DIVIDEND DAY - EVIDENCE FROM THE MILAN STOCK-EXCHANGE

To investigate the effect of taxation on stock price and trading volum e around the ex-dividend day, we use the Italian stock market, where d ividends on two classes of stock are taxed differently. We find that t he weighted average of investors' tax rates is reflected in the ex-day prices and the variance of the relative tax rate across investors is reflected in the volume of trades. We also show that higher transactio n costs result in higher ex-dividend day excess returns and lower abno rmal volume. This finding is consistent with ''profit elimination'' ac tivity by institutions and corporations.