Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day

Abstract

We estimate the costly-arbitrage model of Boyd and Jagannathan (1994) using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We relate the difference in price formation to uncertainty.costly-arbitrage model; estimation risk; Ex-dividend day; imputation-tax credit; legal risk; withholding tax