Ex-day Pricing and Post-Announcement Drift

This study examines share price and trading volumes data around the date of cash dividend distributions made by a sample of companies listed on The London Stock Exchange. The ex-day share price behaviour is modelled to take account of the personal taxes of long-term investors as well as the transaction costs and holding risks of short-term traders. The post-announcement drift is linked to the behaviour of share prices around the exdividend dates. The results show that the abnormal price performance and abnormal volume persist throughout the announcement to ex-dividend day interval. However, the pre-ex-day abnormal performance is not a function of the two factors, dividend yield and transaction costs, linked to short-term trading, but, rather, to the magnitude of dividend changes. The paper concludes that the impact of short-term trading documented in the US market is likely to be overestimated and that, in the UK, the legislation on short-term trading is still preventing short-term traders from capturing dividends and/or ex-day returns are not high enough to compensate these traders from the implied transaction costs. Furthermore, the results imply that, the post-announcement drift in share prices makes short-term trading hypothesis not directly testable. This Version: 10 March 1999