from my course:
Source - Brown & Clarke: XD BEHAVIOUR OF AUSTRALIAN SHARE PRICES
http://www.agsm.unsw.edu.au/eajm/9306/pdf/brown.pdf
“A positive abnormal rate of return before the ex-dividend day followed by a negative abnormal return after the ex-dividend day is consistent with short term trading. It suggests that cum-dividend shares are bought at a premium, held for the dividend entitlement, and then sold at a discount. The incentive to engage in such dividend stripping by taxpayers may be greater for shares offering higher dividend yields.
The drop-off ratio, as conventionally defined, was unchanged by the introduction of a tax on previously exempt funds and the extension of imputation to them on 1 July 1988.” (this means that investors did not understand that the change was beneficial)
“A positive abnormal return before the ex-dividend day, followed by a negative abnormal return immediately after it, is consistent with the short term traders buying cum-dividend at a premium, “capturing” the dividend, then selling at a discount to encourage other buyers back into the market.
For the 1988 to 1991 time period, positive abnormal rates of return were found for the four day period ending on the last cum-dividend day.
The ex-dividend day had the largest positive abnormal rate of return, averaging 2% on a grossed-up basis from 1988 to 1991.
The Australian share market has continued to discount dividends relative to capital gains since 1985. Brown and Walter’s (1986) finding:
there is strong evidence that Australian listed shares have not declined by the full amount of the dividend when they have been quoted ex-dividend.
The Drop-Off Ratio and the Dividend Yield (Tax Clientele Hypothesis)
Elton and Gruber (1970) found that the ex-dividend day drop-off ratio was positively related to dividend yield, i.e. the better the dividend yield, the higher the drop-off ratio was.
In sum, the tax laws are not the whole of the explanation for the ex-dividend day trade-off between dividends and capital gains. The Australian share market, on average, still preferred returns in the form of capital gains over dividends, despite successive tax changes which increased the attractiveness to Australian shareholders of dividends relative to capital gains. Moreover, we estimate that the market, on average, has taken some time to access the implied value of the tax credit.
The results of our empirical analysis suggest that, on average, investors consistently preferred capital gains to dividends.”