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 after the implementation of the tax law. There is evidence that short-term traders continue to focus on high-yield stocks after the 1986 tax reform and the magnitude of ex-dividend 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.