The Moderating Impact of Individual Ownership on The Relationship between Dividend Yield and Ex-dividend Day Excess Return

Abstract

This study investigates the moderating impact of individual ownership on the relationship between dividend yield and ex-dividend excess return. Our sample includes US listed companies for years 2002 to 2010. A cross-sectional regression analysis is done to reveal the moderating impact of individual ownership. Our findings show that there is a positive relationship between dividend yield and ex-dividend day excess return in line with tax clientele theory. We also found that the relationship between dividend yield and the ex-dividend day excess return is positively moderated by individual ownership. These findings reveal that the positive relationship between dividend yield and ex-dividend day excess return stems from individual investors’ dividend tax misgiving in line with tax clientele theory. Moreover, we found a negative relationship between corporate size and ex-dividend day excess return that supports the short selling theory. We conclude that tax-induced dynamic trading theory is the premier justification of ex-dividend day pricing as the mixture of both tax clientele and short selling theories.