Andrew B. Ainsworth

Institutional Trading Around the Ex-Dividend Day

This study uses the trading records of institutional equity funds to examine their ex-dividend trading behaviour. We argue that trading is influenced by the tax incentives facing the fund, the characteristics of individual stocks and by changes in tax legislation. In aggregate, institutions trade to avoid the dividend and franking credit. Changes in tax incentives and the fund’s tax status also affect ex-dividend day trading, with unit trusts dominating the dividend avoidance trades. The results indicate that taxes, transactions costs and the cum-dividend price run-up influence the trading of institutional investors around the ex-dividend day.

Waiting Costs and Limit Order Book Liquidity: Evidence from the Ex-Dividend Deadline in Australia

In theoretical models of limit order books populated with liquidity traders there is a link between order aggressiveness, spreads, and the cost of waiting for execution. We directly test these models using an experimental setting where waiting time is important for traders, namely the ex-dividend day. Consistent with these models, we find that order placement is more aggressive before stocks begin trading ex-dividend. Stocks with higher expected costs of delaying execution experience larger declines in order aggressiveness from the cum-day to the ex-day. Waiting costs also impact effective bid-ask spreads, which fall on the cum-day before rising on the ex-day.

Taxes, Order Imbalance and Abnormal Returns around the ex-Dividend day: Taxes, Order Imbalance and the Ex-Dividend Day

A costly arbitrage model, developed for the Australian imputation tax system, shows that stocks paying dividends with a tax credit are likely targets for ex-dividend arbitrage. We show that order imbalance, based on the direct observation of buyer and seller initiated trades, is a key factor in price movements around the ex-dividend day. Buying pressure before the ex-dividend day aimed at capturing the dividend and tax credit leads to an increase in prices that subsequently reverse in the ex-dividend period. This effect is concentrated in those stocks distributing a tax credit with their dividend payments. The price pressure resulting from order imbalance is substantially higher around the ex-dividend day relative to the effect observed outside this period. Our results reject the model of Frank and Jagannathan (1998) that bid-ask bounce is responsible for the ex-day premium and provide support for explanations based on taxes, transaction costs and incomplete price adjustment on the ex-day.

Dividend Imputation: The International Experience

An overlooked aspect of the debate surrounding Australia’s dividend imputation system is the international experience with dividend imputation. Between 1999 and 2008, nine countries removed their dividend imputation systems. A number of questions arise. What was the motivation for removing imputation? How were dividends taxed after imputation was removed? What happened to corporate tax rates? And ultimately, what are the lessons for Australia? This paper seeks to provide answers to these questions.

Market-Based Structural Determinants of Australian CDS Spreads

We analyse the determinants of Australian corporate credit default swap (CDS) spreads. In addition to structural determinants, consisting of equity returns, equity volatility and risk-free interest rates, we show that CDS spreads are impacted by the uncertainty of asset values as proxied by the dispersion in equity analysts’ price targets. Market-based variables including the changes in the S&P/ASX200 index return and stock-level option-implied volatility also contain valuable information about spreads. The analysis of spread determinants also shows that during the financial crisis equity-based market variables featured more prominently in the pricing of CDS spreads than credit ratings.