Keith Jakob

Tick Size, NYSE Rule 118, and Ex-Dividend Day Stock Price Behavior

Bali and Hite (1998) and Dubofsky (1992) propose models in which market microstructure effects play a role in the ex-dividend day price drop anomaly. Bali and Hite suggest that the anomaly is caused solely by price discreteness, while Dubofsky suggests that NYSE Rule 118 is also involved. We test these models by examining cum- to ex-day price drops during the one-eighth, one-sixteenth, and decimal tick size regimes. While the evidence is qualitatively consistent with Dubofskys predictions, neither model is satisfactory in a quantitative sense. One of our main empirical findings is that no significant decline was evident in the magnitude of the ex-day anomaly after the tick size reduction.

Order Imbalance on Ex‐Dividend Days

In this article we test an alternative to the tax-based explanation for why prices decline on ex-dividend days by an amount less than the dividend. We examine whether there is order imbalance on cum- and ex-dividend days. We find that on ex-dividend days, there are more buys than sells in the number of orders, but not in the number of shares ordered, and the imbalance in the number of orders is limited to small orders. We find that the difference between the dividend amount and the ex-dividend-day price drop is significantly related to the magnitude of the buy-sell order imbalance. We find no order imbalance on cum-dividend days in either the number of orders or the number of shares ordered. 2003 The Southern Finance Association and the Southwestern Finance Association.

Are ex‐day dividend clientele effects dead? Dividend yield versus dividend size

We document new evidence that the ex-dividend day stock price behavior in the U.S. is inconsistent with the tax explanation in several aspects. We find that within a tick multiple, as dividend size increases, dividend yields increase, but the price-drop-to-dividend ratios decrease. For dividends that are less than a tick, there is no relation between price-drop-to-dividend ratio and dividend yield, and for dividends that are less than half a tick, the average price drop is larger than dividend amount. These facts contradict the tax explanation of the ex-dividend day phenomenon. But these patterns are qualitatively consistent with Dubofskys argument that the exchange rules on how to adjust the prices in the existing limit orders affect ex-day price drop behavior. The positive relation between the price-drop-to-dividend ratio and dividend yield is more pronounced as dividend size increases. We point out this is also qualitatively consistent with Dubofsky.

The Ex-dividend Day: Action On and Off the Danish Exchange

We examine ex-dividend day behavior on the Copenhagen Stock Exchange. We report price-drop ratios of 32% and 18% for close-to-close and close-to-open samples, respectively, well below the ratios observed in the United States. Our findings are generally consistent with limit order adjustment explanations from recent literature. In Denmark, a unique average price trading opportunity makes it possible for investors to capture dividends without directly altering supply or demand in the regular market, and therefore not necessarily driving the price-drop ratios toward one.

Risk-adjusted returns of socially responsible mutual funds: how do they stack up?

This article establishes index suitability on a risk-adjusted basis for socially responsible investment (SRI) mutual funds that specify small-to-mid- or large-capitalization indexes as their performance benchmarks. Using a four-factor model, the authors calculate factor loadings for SRI mutual funds and their specified benchmark index and measure deviations with respect to the risk factors in the model using the authors’ F-test methodology. The results indicate that SRI mutual fund managers may not be selecting benchmark indexes that are true reflections of the risk characteristics associated with the funds’ investment activities, thus overstating or understating risk-adjusted performance. By considering alternative approaches to abnormal performance measurement, researchers can significantly change their conclusions regarding the economic contribution of SRI mutual fund managers. By applying similar methodologies, market participants may be able to more accurately assess risk-adjusted SRI fund manager performance and SRI-fund-specific risk characteristics relative to the benchmark index selected by the manager or other appropriate benchmark indexes. As a result, sustainable investors and funds managers will be more likely to accurately assess risk-adjusted performance relative to an appropriate benchmark.

The Ex-Dividend Day Stock Price Anomaly: Evidence from Denmark

We examine ex-dividend day behavior on the Copenhagen Stock Exchange. We report price drop ratios of 25%, well below the 70-80% from U.S. data. The tax clientele hypothesis predicts ratios between 57% and 126% based on the Danish tax structure. Our results conflict with tax and tick size models, but they are consistent with limit order adjustment explanations from Dubofsky (1992) and Jakob and Ma (2004, 2005). An unusual average price trading opportunity also facilitates the low ratios. Average price trades have no direct supply or demand impact in the market, and therefore do not drive the ratios toward one.

Out of the money or striking it rich? Evidence on the risk-adjusted return performance of options-based equity funds versus the S&P 500 and other benchmark alternatives

This article examines the risk–return characteristics of 29 options-based equity funds, their self-specified S&P 500 total return benchmark index, and a suite of alternative options-based strategy indexes in the United States from 2010 to 2015. Using a multifactor risk-adjustment model, the authors attempt to establish whether fund managers are choosing suitable benchmark indexes in terms of their funds’ investment style/strategy and risk profile. Our findings indicate that options-based fund managers are unable to outperform both before and after adjusting for risk and after consideration of management/transaction costs. They also show that the S&P 500 total return index may not be the most appropriate benchmark for options-based funds. For instance, options-based fund managers appear to be selecting broad-based equity benchmark indexes that do not adequately reflect the risk–return characteristics associated with the funds’ investment strategy/options trading activities, thus understating their risk-adjusted performance. By considering alternative approaches to abnormal performance measurement, fund managers, investors, market regulators, and academics can significantly change the conclusions they draw regarding the economic contribution of options-based fund managers. Furthermore, market participants can more accurately assess risk-adjusted options-based performance and fund-specific risk characteristics relative to the benchmark index chosen by the manager or to alternative benchmark indexes.

Loan prepayment and default analyses of a US regional community development financial institution

Community development financial institutions (CDFIs) are instrumental lending organizations responsible for a large part of regional new venture creation. CDFIs provide financial services, loans, training, and technical assistance services to individual entrepreneurs and small businesses that are often turned away by conventional financial lending institutions. In most cases borrower and/or loan specific characteristics are outside of generally acceptable ranges. Loan prepayment risk and repayment risk are two financial hazards that CDFI managers must effectively control. We examine historical runoff rates (prepayment risk) and default rates (repayment risk) of the loan portfolio of a mid-sized regional CDFI. Specifically, we examine how loan prepayment risk is influenced by loan term at origination. We find that longer-term loans are paid back relatively more quickly. We also gather data from repaid and defaulted loans and identify borrower and loan specific characteristics that significantly influence default rates. These include measures such as borrower FICO score, household income, prior bankruptcy, the collateral coverage ratio, and whether the loan is gap or joint bank-partnered financing.

Do corporate directors ‘heap’ dividends? Evidence on dividend rounding and information uncertainty in Australian firms:

In this study, we examine the extent of dividend heaping in Australian firms between 1976 and 2015. Our findings show that 27.39% of dividends greater than or equal to 2.5-cents are heaped in 2.5-cent intervals, while 70.90% of dividends less than 2.5-cents are heaped in 0.25-cent intervals. We find that the heaping phenomenon decreases over time and average dividend size increases. We also show that when establishing the likelihood of dividend heaping, stock return volatility and firm size are consistent with the information uncertainty hypothesis. Dividend heaping also appears to be influenced by firm-level characteristics that are inconsistent with the hypothesis. For instance, the likelihood of heaping increases with dividend size and firm age.

The impact of nominal stock price on ex-dividend price responses

In this paper, we examine whether nominal stock price can help to explain the ex-dividend day anomaly where stock prices drop by less than the dividend amount on the ex-dividend date. We find that stocks with lower nominal prices have ex-dividend day price drops that are more consistent with theoretical predictions based on an efficient market. After controlling for factors that have been previously documented to influence ex-dividend day stock price behavior, price-drop-to-dividend ratios are closer to one for lower priced stocks. To further explore this phenomenon, we examine the change in the price-drop-to-dividend ratio around stock splits. Firms that split their shares have a larger price-drop-to-dividend ratio after the split, and companies that reverse split their shares have a smaller price-drop-to-dividend ratio after the split. Our evidence indicates that ex-dividend day stock price behavior is influenced by the nominal price of a share and that this relation could also influence the decision to split a firm’s shares.