The Effect of Cum- to Ex-Dividend Changes on UK Share Prices

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Abstract
The price behaviour of a share at the time of its going ex-dividend presents an intriguing observable. Previous authors have argued that the statistic is indicative of ‘shareholder rationality’. This is to say, if shareholders ‘rationally' capitalise their dividends received on an after personal tax basis, the change in the price of a share on its going ex-dividend should be a well-defined function of shareholders’ assessment of their own personal tax brackets. In turn this would substantiate the ‘clientele effect’ hypothesis whereby shareholders with high income/low capital gain tax brackets hold shares with high growth companies, and shareholders with low income/high capital gain tax brackets hold shares with low-growth companies. Our statistical analysis provides evidence of the clientele effect in the UK stock market.