Options, taxes, and ex-dividend day behavior

Article Abstract:

Using data from the United Kingdom Trade Options Market for securities listed during the period from 1979 to 1984, an innovative method for determining expected per share price fall-offs is provided that is based on option pricing, as opposed to actual per share price fall-offs. According to this new share fall-off estimating method, average price fall-offs are roughly equal to 55 to 60 percent of option dividends and fall-offs vary inversely with dividend yields. The research also indicates that expected fall-off does not differ in any significant way from experienced fall-off, and that assumptions which equate stock option price fall-offs with dividends result in downward biased option value estimates.

Economic aspects, Securities, Stock options, Securities taxes

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Stock returns, dividend yields, and taxes

Article Abstract:

Using an improved measure of a common stock's annualized dividend yield, we document that risk-adjusted NYSE stock returns increase in dividend yield during the period from 1963 to 1994. This relation between return and yield is robust to various specifications of multifactor asset pricing models that incorporate the Fama-French factors. The magnitude of the yield effect is too large to be explained by a "tax penalty" on dividend income and is not explained by previously documented anomalies. Interestingly, the effect is primarily driven by smaller market capitalization stocks and zero-yield stocks. (Reprinted by permission of the publisher.)

Stocks, Earnings per share

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