The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Options, Taxes, and Ex‐Dividend Day Behavior
Published: 06/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb05045.x
COSTAS P. KAPLANIS
A novel way of estimating the expected as opposed to the actual share price fall‐off is developed using option prices. This method is applied to the UK Traded Options Market using data from 1979 to 1984. The results show that: (a) the average expected fall‐off implicit in option prices is around 55 to 60% of the dividend and significantly different from it. The fall‐off also varied inversely with the dividend yield, which is consistent with the prediction of the “tax clientele hypothesis.” (b) The estimates of the expected fall‐off were not significantly different from the actual fall‐off. (c) Finally, the results imply that the usual assumption made in valuing options on dividend‐paying stocks, that the fall‐off is equal to the dividend, would lead to downward‐biased estimates of the option value.