WHY DO STOCK-PRICES DROP BY LESS-THAN THE VALUE OF THE DIVIDEND - EVIDENCE FROM A COUNTRY WITHOUT TAXES

It is well documented that stock prices on ex-dividend days drop by le ss than the value of the dividend, on average. This has commonly been attributed to the effect of tax clienteles. We examine data from the H ong Kong stock marker, where neither dividends nor capital gains are t axed. As in the U.S., the average stock price drop is less than the va lue 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 ma rket microstructure arguments. (C) 1998 Elsevier Science S.A. All righ ts reserved.