THE IMPACT OF THE 1986 TAX REFORM ON EX-DIVIDEND DAY VOLUME AND PRICE BEHAVIOR

This paper examines the impact of the 1986 Tax Reform Act (TRA) on trading volume and stock price behavior around the ex-dividend day. The paper shows that changes in capital gain taxes exert a differential effect on the trading volume and ex-day premiums of stocks with different yields and transaction costs. Results show that the trading volume around the ex-dividend day declines añer the implementation of the tax law. There is evidence that short-term traders continue to focus on high-yield stocks añer the 1986 tax reform and the magnitude of exdividend day premiums is directly related to their short-term trading activity. Ex-dividend day premiums and abnormal trading volume around the ex-dividend day are significantly affected by transaction costs, and these effects appear to be stronger after 1986.