Tax Heterogeneity and Trading Volume around the Ex-dividend Day: Estonian Evidence

This paper examines the trading pattern around the ex-dividend day in the Estonian stock market between 2000 and 2006. An analysis of the Estonian income tax law confirmed that despite its simplicity there exists differential treatment of capital gains and dividends as well as tax heterogeneity among investors. An empirical analysis of the trading data showed a statistically significant abnormal trading volume around the ex-dividend day. By putting these two aspects together and investigating short-term changes in ownership structure around the ex-dividend day it can be concluded that in the Estonian stock market investors use dynamic tax-induced trading strategies around the ex-dividend day. The occurrence of the learning effect and avoidance of transaction costs were also revealed by an analysis of these transactions. 1 Lecturer in Corporate Finance and Investments, School of Economics and Business Administration, University of Tartu. E:mail:[email protected] Acknowledgements: The author thanks the Tallinn Stock Exchange for providing detailed trading data. His deepest gratitude for thoughtprovoking comments and suggestions is due to Tõnu Roolaht and Otto Karma (University of Tartu), Margus Kõomägi (Pärnu College, University of Tartu) and the participants in the seminar held at Åbo Akademi (Finland) in August 2006. Sincere thanks also go to Eda Tammelo, who proof-read this paper. This study was supported by the Estonian Science Foundation Grant 6630. The content of the article is the sole responsibility of the author, and in no way represents the views of the supporting institutions.