Pekka Hietala

Equity markets and personal taxation: The ex-dividend day behaviour of Finnish stock prices

Abstract This paper analyzes the ex-dividend day behaviour of stock prices in the Finnish stock market. The tax structure in Finland is strikingly similar to the new tax structure in the U.S. which was for the first time in effect during the fiscal year 1987. The results in this paper may thus also illuminate the ex-dividend day behaviour in the U.S. stock markets under the new tax law. Our empirical data show that the average drop in the stock prices on their ex-dividend days has been 90% of the amount of the dividend during the years of 1974 to 1985. This is shown to be consistent with the tax explanation taking into account the Finnish tax laws. It is especially shown that the marginal seller on the ex-dividend days is an individual investor with a marginal tax rate of approximately 50%.

The ex-dividend day behaviour of Finnish restricted and unrestricted shares

We analyse the ex-dividend day behaviour of two classes of shares whose trading is potentially dominated by investors under different tax regimes because of foreign ownership restrictions. Our results provide evidence in favour of the hypothesis that long-term investors are the marginal investors that determine the stock prices around the ex-dividend day, and against the hypothesis that short-term trading is the driving force behind equilibrium ex-dividend ratios.

Informed Trading, Short Sales Constraints, and Futures' Pricing

The purpose of this paper is to provide an explanation for relative pricing of futures contracts with respect to underlying stocks using a model incorporating short sales constraints and informational lags between the two markets. In this model stocks and futures are perfect substitutes, except for the fact that short sales are only allowed in futures markets. The futures price is more informative than the stock price, because the existence of short sales constraints in the stock market prohibits trading in some states of the world. If an informed trader with no initial endowment in stocks receives negative information about the common future value of stocks and futures, he is only able to sell futures. Uninformed traders also face a similar short sales constraint in the stock market. As a result of the short sales constraint, the stock price is less informative than the futures price even if the informed trader has received positive information. Stocks can be under- and overpriced in comparison with futures, provided that market makers in stocks and futures only observe the order flow in the other market with a lag. Our theory implies that: 1) the basis is positively associated with the contemporaneous futures returns; 2) the basis is negatively associated with the contemporaneous stock return; 3) futures returns lead stock returns; 4) stock returns also lead futures returns, but to a lesser extent; and 5) the trading volume in the stock market is positively associated with the contemporaneous stock return. The model is tested using daily data from the Finnish index futures markets. Finland provides a good environment for testing our theory, since short sales were not allowed during the period for which we have data (27 May 1988 - 31 May 1994). We find strong empirical support for the implications of our theory.

The efficiency of the Finnish market for right issues

Abstract This paper analyzes the efficiency of the Finnish market for right issues. The rights traded on the Helsinki Stock Exchange (HSE) are similar instruments to warrants with some special features attached to them. The paper first derives appropriate arbitrage conditions for these rights which must be satisfied in informationally efficient markets, and then examines these conditions using both ex-post and ex-ante test procedures. The ex-post tests, which jointly examine market efficiency and synchroneity of the rights and stock market, show a staggering amount of violations against the arbitrage bounds. However, the ex-ante tests reveal that high transaction costs prevent normal investors from benefitting from these violations. Stockbrokers themselves, however, seem to be able to earn arbitrage profits in the rights market.