Ex-dividend day price and volume: the case of 2003 dividend tax cut.

(1) Previously, assets held for more than one year were generally taxed at a maximum net capital gains rate of 20 percent (ten percent for taxpayers in the ten and 15 percent tax bracket). A lower rate of 18 percent (eight percent for taxpayers in the ten and 15 percent tax brackets) applied to capital gains on assets held for more than five years (qualified five-year capital gains). Under the 2003 Act, the maximum net capital gains tax for assets held for more than one year was lowered from 20 to 15 percent (and from ten to five percent for taxpayers in the ten or 15 percent tax bracket). These new rates apply to sales and exchanges and payments received on or after May 6, 2003.

(2) See for example, Campbell and Beranek (1955), Elton and Gruber (1970), Kalay (1982), Lakonishok and Vermaelen (1983), Barclay (1987), Karpoff and Walkling (1990).

(3) As described by Elton, Gruber, and Rentzler (1984), at the time of the original Elton and Gruber (1970) analysis, transaction costs were sufficiently high to ensure that short-term traders were not setting equilibrium prices on the ex-dividend day.

(4) Chay, Choi, and Pontiff (2006) find investors are compensated seven cents in unrealized gains for each dollar of realized capital gains, that is, one dollar of realized capital gains is equivalent to 93 cents of unrealized gains.

(5) See Cloyd et a. (2006) for further discussions of how the positive relation between dividend yield and ex-day abnormal returns may be mitigated by heterogeneous tax rates across investors.

(6) The share and distribution codes are the same as those used for the announcement analysis in Chetty et al. (2007).

(7) The minimum tick size is one cent.

(8) Following Elton, Gruber, and Blake (2005) among others, we eliminate observations with prices below five dollars because for low-priced securities, the bid/ask spread is large relative to the dividend and introduces noise into our analysis.

(9) See details in Graham et al. (2003).

(10) Our data show that the PDR is extremely high in the second quarter of 2003 when the Act is enacted and the PDRs of the third and fourth quarter of 2003 are still close to that of 2002, which implies a lag.

(11) The natural ex-dividend price is the opening price. But the opening price is biased because all orders on the books are adjusted by the amount of the dividend. Therefore, we use closing prices and adjust for the daily return on the ex-dividend day (e.g., Elton et al., 2005; Lamdin and Hiemstra, 1993; and Wu and Hsu, 1996).

(12) Graham et al. (2003) trim the top and bottom 2.5 percentiles of premium to reduce the effect of outliers in their analysis. As an alternative to winsorizing our data, we trim the top and bottom 2.5 percentiles and the results are qualitatively the same as those reported in the paper.

(13) We eliminate share codes for closed-end funds, unit investment trusts, ETFs, ADRs, REITs, and distribution codes for unknown, unspecified, special, interim, and non-recurring dividends.

(14) Our results appear consistent with Chetty and Saez (2006) who provide detailed analyses of the effect of the dividend tax cut on overall corporate payout policy.

(15) To determine the sensitivity of our results to requiring firms to pay dividends over all four years of the pre- and post-Act period, we estimate all of our model specifications with the full sample of firms that meet the share and distribution code requirements. Our results are qualitatively the same as those reported unless otherwise noted in the paper.

(16) Our PDR calculations appear reasonable compared to Chetty et al. (2007) who document a median premium of 0.61 in 2002 and 0.74 for 2004.

(17) If we estimate Panel A of Table 4 for the full sample of firms without restricting the sample to dividend payers in all four years, the risk measure becomes insignificant in the post-Act period.

(18) Graham et al. (2003) divide observations based on quarterly dividend yields into five groups: less than 0.5 | percent, between 0.5 and one percent, between one and 1.5 percent, between 1.5 and 2.0 percent, and greater than 2.0 percent. Because we have a very small number of observations with an annual dividend yield greater than eight percent (2% x 4), we combine these observations into the fourth group.

(19) The graph of the median PDR shows a similar pattern.

(20) If we estimate the full sample without winsorizing the data, we find that the overall CAV significantly decreases in the post-Act period. We also estimate AV utilizing the log of turnover as described by Chae (2005), but find that our results are highly sensitive to this adjustment. We note that much of the abnormal trading volume activity occurs for high dividend yield stocks. Thus, mitigating the effect of the high dividend yield stocks on abnormal trading volume makes it difficult to draw inferences regarding dividend clienteles. Therefore, we caution the reader that our results are sensitive to the choice of proxy for abnormal trading volume and the trimming of volume data.

(21) If we estimate Table 9 for the full sample of firms without restricting the sample to dividend payers in all four years, we find a negative and significant relation between idiosyncratic risk and trading volume in all four specifications. TABLE 1 SUMMARY OF DIVIDEND PAYMENT

2001 2002 2003 Number of firms paying dividends 1,751 1,661 1,757 Number of firms initiating dividends 112 102 215 Number of firms discontinuing dividends 310 192 119 Number of firms continuing dividends 1639 1559 1542 Number of firms increasing dividends 707 619 715 Number of firms with no change in dividends 798 798 684 Number of firms decreasing dividends 134 142 143 Average annual dividend amount per share 0.536 0.546 0.547 Percentage change in dividend 1.13% 1.87% 0.18% Average annual dividend yield 2.57% 2.47% 2.36%

2004 2005 Number of firms paying dividends 1,847 1,898 Number of firms initiating dividends 190 181 Number of firms discontinuing dividends 100 130 Number of firms continuing dividends 1657 1717 Number of firms increasing dividends 844 898 Number of firms with no change in dividends 678 659 Number of firms decreasing dividends 135 160 Average annual dividend amount per share 0.560 0.583 Percentage change in dividend 2.38% 4.11% Average annual dividend yield 2.11% 2.16% Note: This table provides summary of firms (share codes 10-12) paying regular dividends (distribution codes 1222, 1232, 1242, and 1252) between 2001 and 2005. Firms paying lower than one-cent dividend or with price lower than five dollars are eliminated. Percentage change in dividend is calculated as (average annualized dividend per [share.sub. t]--average annualized dividend per [share.sub.t-1])/ average annualized dividend per [share.sub.t]. TABLE 2 EX-DIVIDEND DAY PDR

Panel A: PDR for Taxable

Quarterly Dividends Year 2001 2002 2004 Median 0.510 *** 0.613 *** 0.763 *** (Sign test p value) (0.00) (0.00) (0.00) Mean 0.653 *** 0.645 *** 0.857 *** (t-stat) (9.68) (11.14) (5.92) Min -18.81 -16.13 -13.37 Max 20.61 18.24 14.63 S.D 6.68 5.81 4.64 Sample size 4,318 4,713 4,772

Panel B: Difference in PDR

Pre-Act Post-Act Post-Pre Median 0.562 *** 0.759 *** 0.197 *** (Wilcoxon p value) (0.00) (0.00) (0.00) Mean 0.648 *** 0.864 *** 0.215 *** (t-stat) (14.74) (8.17) (7.40) Sample size 9,031 9,449 18,480

Panel A: PDR

for Taxable

Quarterly Dividends Year 2005 Median 0.757 *** (Sign test p value) (0.00) Mean 0.870 *** (t-stat) (5.65) Min -13.9 Max 14.67 S. D 4.62 Sample size 4,677

Panel B: Difference

in PDR

Difference Difference