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Equity markets and personal taxation: the ex-dividend day behavior of Finnish stock prices

Author: Hietala, Pekka INSEAD Area: FinanceIn: Journal of Banking and Finance, vol. 14, no. 2-3, aug. 1990 Language: EnglishDescription: p. 327-350.Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: This paper analyses the ex-dividend day behavior of stock prices in the Finnish stock market. The tax structure in Finland is strikingly similar to the new tax structure in the US which was for the first time in effect during the fiscal year 1987. The results in this paper may thus also illuminate the ex-dividend day behavior in the US stock markets under the new tax law. The empirical data show that the average drop in the stock prices on their ex-dividend days has been 90% of the amount of the dividend during the years 1974 to 1985. This is shown to be consistent with the tax explanation taking into account the Finnish tax laws. It is especially shown that the marginal seller on the ex-dividend days is an individual investor with a marginal tax rate of approximately 50%
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This paper analyses the ex-dividend day behavior of stock prices in the Finnish stock market. The tax structure in Finland is strikingly similar to the new tax structure in the US which was for the first time in effect during the fiscal year 1987. The results in this paper may thus also illuminate the ex-dividend day behavior in the US stock markets under the new tax law. The empirical data show that the average drop in the stock prices on their ex-dividend days has been 90% of the amount of the dividend during the years 1974 to 1985. This is shown to be consistent with the tax explanation taking into account the Finnish tax laws. It is especially shown that the marginal seller on the ex-dividend days is an individual investor with a marginal tax rate of approximately 50%

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