The Ex-Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects/Discussion

A current economics controversy concerns how to attribute the effects of dividend policies on stock returns. Several attempts have been made to relate the effects to differential taxation of dividends over capital gains, but other studies reject the relationship as too simplistic. In an attempt to clear up the controversy, 3 possible explanations are examined: 1. clientele effects, 2. information effects, and 3. the ability of dividend yields to stand proxy for changes in security risk. Empirical testing rejects the importance of clientele effects in the prices of assets, and shows dividend clienteles are not consistent with equilibrium prices. Information effects also fail to explain the dividend effect. Only the proxy ability of dividend yields is confirmed. Gibbons questions whether the use of daily data can completely remove information effects from the dividend yield.