EX DIVIDEND DAY STOCK-PRICE BEHAVIOR - DISCRETENESS OR TAX-INDUCED CLIENTELES

Since prices are constrained to discrete tick multiples while dividend s are essentially continuous, ex day price changes will not equal divi dends. We argue that the expected price drop is strictly less than the dividend but within one tick of the dividend. The price-drop-to-divid end ratio will(i) be less than one, (ii) increase with dividends gener ally, and (iii) decline between tick multiples, giving a sawtooth patt ern in the data, Since dividends and dividend yields are highly correl ated, discreteness will give the impression of tax-induced dividend cl ienteles even if there are none. Taxable cash dividends and nontaxable stock dividends exhibit similar ex day behavior. (C) 1998 Elsevier Sc ience S.A. All rights reserved.