Unlike the NYSE the Toronto Stock Exchange (TSX) does not adjust prices in the outstanding limit orders in succession ex-dividend days.

Unlike the NYSE the Toronto Stock Exchange (TSX) does not adjust prices in the outstanding limit orders in succession ex-dividend days. We find that TSX ex-day stock price behavior differs from that onward the NYSE in several elucidation aspects. In each case, the TSX ex-day behavior is consistent with the lack of a limit order adjustment mechanism. Our findings confirm that market microstructure is an important factor that contributes to the observ Canadian ex-day price behavior. Our findings also melt the puzzle of the relatively small ex-day price ear-ring in Canada.

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In a complete capital market, the share price following a dividend should fall according to exactly the amount of the dividend paid forward each share. However, empirical work forward this issue consistently finds that onward average, stock prices actually globule by less than the dividend amount forward the ex-dividend day.

Although there are several explanations for this phenomenon, united major puzzle of the ex-dividend day behavior remains. Lakonishok and Vermaelen (1983 1992) find that the ex-day price-drop-to-dividend ratio forward the Toronto Stock Exchange (TSX) is 40% or les (depending onward whether the price drop is measured from close-to-close or close-to-open). This ratio is to a great degree smaller than the relative price ear-ring of 70% to 80% reported in studies of US data. Lakonishok and Vermaelen note that they do not have an explanation for for what purpose the price drop is to such a degree small in Canada, and consider this finding to be the same of the major unresolved issues in ex-dividend day stock price behavior.

In this article, we move a resolution to this pose which we base on Dubofsky's (1992) market microstructure explanation of the ex-dividend day price ear-ring behavior. Dubofsky argues that automated ex-day limit order adjustment mechanisms mastery ex-dividend day stock price behavior. In the US, the NYSE AMEX, and Nasdaq all use the same automated limit order adjustment mechanism in succession ex-dividend days.

Our [i]clavis[/i] observation is that the TSX does not have an ex-dividend day limit order adjustment mechanism like those of the NYSE AMEX, or Nasdaq. upon the TSX, limit orders are not adjusted by the exchange upon ex-dividend days. If on the ex-day the transaction prices forward the TSX are influenced by way of the existing limit order prices, then the size of the ex-day price globule will be biased toward naught We conjecture that this structural difference explains the a great quantity [i]or[/i] amount of smaller Canadian price-drop-to-dividend ratio lay the foundation of by Lakonishok and Vermaelen (1983 1992) We find evidence to support this conjecture

In addition to resolving the Canadian ex-day price pendant puzzle, our work tests Dubofsky's (1992) and Bali and Hite's (1998) designs using Canadian data. Although one as well as the other models are market microstructure-based explanations of the ex-day price ear-ring behavior, they differ in several first note of the scale aspects. The major factor in the Dubofsky example is the limit order adjustment mechanism upon the ex-day, which is different in Canada than in the US. However, tick size, which is the barely factor that determines ex-day price small quantity in Bali and Hite's gauge is identical to the US for a large portion of the sample. Therefore, Bali and Hite make the same predictions about ex-day price behavior in Canada as in the US, on the contrary Dubofsky makes different predictions in the pair countries. Our empirical results, that the ex-day price behavior in Canada is significantly different from that in the US in several important aspects (even during the portion of the sample when the tick sizes in the pair countries are identical), support Dubofsky's model

Aside from the market microstructure explanation of the ex-day price small quantity behavior, two other explanations are the tax hypothesis (see Elton and Gruber, 1970 Robin, 1991 and Graham, Michaely, and Roberts 2003 among many others) and the interaction of taxes and transaction richnesss (Kalay, 1982, and Boyd and Jagannathan, 1994) Lakonishok and Vermaelen (1983 1992) find that the small price small quantity ratio in Canada is not consistent with the tax hypothesis. The relatively small price least bit is also at odds with the transaction require to be paid [i]or[/i] undergones explanation, since that model predicts a larger price very little than the tax hypothesis does.

Therefore, among the three prevailing lines of research upon the ex-dividend day stock price behavior, the solely one that could explain the Canadian ex-day pose is a market microstructure argument. This is exactly the direction we dog in this article.

Using the different exchange-mandated limit order adjustment mechanisms of the NYSE and the TSX we declare a purpose and examine five hypotheses about the difference in the ex-day price behavior across the couple exchanges. We test these hypotheses with all cash dividend distributions to everyday equities on the TSX from 1975 to 2002 We compare the TSX be deriveds to findings for US data in Dubofsky (1992) Bali and Hite (1998) and Jakob and Ma (2004)

We report three elucidation findings. First, like Lakonishok and Vermaelen (1983) we find that the price-drop-to-dividend ratio in our larger Canadian sample is abundant smaller than that in the US. inferior in Dubofsky (1992) and Jakob and Ma (2004) the NYSE dividends have average price-drop-to-dividend ratios that are larger than undivided for several dividend-size groupings, including the dispose in which dividends are les than half the tick size. In contrast, we find that in Canada, average price pendants are smaller than the dividend for all dividend sizes. Third, forward the NYSE, Dubofsky (1992), Bali and Hite (1998) and Jakob and Ma (2004) find a clear sawtooth-shaped relation between the dividend amount and ex-day price very little but we find no of the like kind pattern in our TSX data.