Dividend Taxes and the Ex-Dividend Stock Price Drop

# How does income tax affect the Ex-dividend behavior of a stock?


# How does income tax affect the Ex-dividend behavior of a stock?












If there are no taxes and no volatility, I would expect the the move in a stock on the Ex-dividend date to be equal to the gross value of the dividend.

However, if I am taxed, I find the problem gets somewhat complicated, because I need to consider that

- I may be less inclined to hold a dividend-paying stock, but

- I could just sell out and buy back across the Ex-dividend date, and

- ultimately, a company that just paid out \$1 in dividends should be worth \$1 less, regardless of who ended up with the cash.

Based on the first 2 considerations I'd say that the drop on the ex-dividend date gradually reduces as taxes increase, but this is complicated by the 3rd point, which suggests to me that the stock should still drop by the value of the dividend.

Mixing these together suggests that increasing taxes should lower the price of stocks, but I can't put my finger on how much.

In my simple scenario, what would the price drop across the ex dividend date be assuming rational market participants?

## Answer by Antoine Conze (score 4, accepted)

https://quant.stackexchange.com/a/34286

If you assume the same tax rate $\alpha$ for all shareholders, then out of a dividend $D$ the amount $\alpha D$ goes to the government and the amount $(1-\alpha) D$ goes to the shareholders. In a theoretical pure no arbitrage environment, and assuming no interest rate discounting for the sake of simplicity, this would imply that the stock price would go down by $\alpha D$ on the day the dividend is voted by the board, and $(1-\alpha) D$ on the ex-dividend date.

## Answer by will (score 3)

https://quant.stackexchange.com/a/34285

I would have put this in a comment, but it was too long. I wouldn't really classify it as an answer though.

You are correct that the company paying out \$1 in dividends drops the value of the company by \$1.

You are also correct that it is more complicated than this.

Here are some things to consider:

- The dividend yields of stocks also drive demand for them, which changes the price.

- Capital gains tax. If you can sell before the dividend and buyback after, yielding a profit of the dividend amount, then you'll have to pay capital gains tax on that.

- There are different tax rates in different countries - so why not lend your shares to someone who pays no dividend tax (for a fee), and then get them back after the dividend? Guess what, this happens already (dividend tax arbitrage). And guess what rate people will charge you for this - that's right, it's a bit less than your dividend tax rate.

- There is actually another even more amazing/ridiculous. Sometimes you have strange local (i.e. per country) laws that influence dividend values even more. here's a paper about a 42.86% tax credit on German dividends for German shareholders. So guess what, you lend your German shares to a German bank, they collect a larger dividend than you, and share some of the profits with you.