Efficient Market Hypothesis Ex-Dividend Date - Dissertation Example

Download file to see previous pages Anomalies in the expression of the standard, tax-centric theory of stock performances have been noted and described. While a tax-centric hypothesis has explanatory power, this study examines evidence that there are additional forces of corporate governance, ownership concentration, and market capitalization that can adjust the performance of dividends independent of taxation. This study is a meta-analysis describing the Western standard for market forces pertaining to dividend taxation, on the assumption that stock prices must be adjusted to less than the amount of the dividend in order to compensate for taxation. Yet the comparison with Asian markets introduces exceptions to that premise. Ultimately, more data is needed in order to falsify the tax-centric hypothesis, however, this principle is subject to modification and interference by other market forces that influence the behaviors of investors and the performance of stocks.

Introduction
Since the advent of tradable stocks on the national and international markets, there has been a great deal of calculation and speculation in regard to the relationship between stock returns and dividend yields, both in the informal imagination of financial advisors, as well as in the formalized literature therein. Decades ago, popularize models of tax effects created the presumption that higher-risk investments were necessary to compensate for returns that incurred greater taxes. Returns on investments should be risk-adjusted with respect to stocks. This would compensate the investor for higher rates of taxation through higher dividend yields. This is necessary due to higher levels of taxation of dividend income as compared with capital gains income. (Brennan, 1970 p.417-427)

To be specific, dividend income refers to profits yielded by a publicly traded corporation. In which case, of course, the profits can be turned back into the business, to invest in facility enhancements, or possibly salaries – in which case they qualify as retained earnings. Or they can be distributed to shareholders who provided initial investments that contributed to the company's initial success. All with respect to the initial contribution based upon the value and number of shares purchased by a particular investor. (Sullivan and Sheffrin, 2003) these may take a variety of forms, such as currency cash dividends, Stock/scrip dividends that constitute additional shares of the Corporation, or property dividends, which can take a variety of forms including shares of another corporation or other assets or services. (Sullivan and Sheffrin, 2003)

In many cases, taxation rates are higher for dividend income compared with capital gains. To be specific, we are referring to capital gains as it pertains to profits from a capital asset, often real estate, and gains are typically not seen until the asset is sold for a higher price than it was initially purchased for, ideally. ...Download file to see next pages Read More