Price Movements and Trading Volume Around Ex-Dividend Day in a Market with a High Degree of Foreign Ownership: Evidence from Norway

Abstract

This paper investigates the presence of an ex-dividend price anomaly in a market heavily influenced by foreign investors, the Oslo Stock Exchange, post the implementation of the 2006 tax reform that equalized taxes on dividends and capital gains in Norway. We study the price-drop-to-dividend-ratio derived by comparing the ex-dividend price movements to the corresponding dividend per share. Our results identify a mean ratio equal to 0.753. This is inconsistent with our expectation of a ratio equal to 1, which is what the Norwegian tax regulations would imply. Hence, we confirm the presence of an ex-dividend price anomaly on the Oslo Stock Exchange. Due to domestic tax regulations and from the Norwegian investor´s point of view, the tax-induced clientele hypothesis should be an irrelevant explanation to the observed anomaly. However, in this thesis we provide an extension to the latter hypothesis by including foreign owners, naturally facing different tax regulations, as an important investor group. Using two different data sources, we find mixed results on the relationship between foreign owners and ex-dividend price movements. However, based on the data source of main interest, we find significant results not all consistent with foreign ownership driving the ex-dividend price anomaly. The observed anomaly combined with domestic tax regulations and weak results on foreign influence, makes us question the tax-induced clientele hypothesis. In addition, this paper provides results confirming abnormal trading volume around ex-dividend day. Consistent with previous research, we have reason to believe that the observed abnormal volume is partly driven by domestic and foreign owners with different dividend preferences trading with each other around ex-dividend day.