An Examination of Ex – Dividend Day Stock Returns: A Case of Pakistan Stock Exchange

Abstract

This research paper attempts to investigate the impact of various factors on abnormal returns of stocks around ex–dividend day. For this, stocks listed in Pakistan stock Exchange have been examined considering a time span of twenty years.  This study covers the time span when capital gain tax on sale of securities was introduced in Pakistan in July 2010. Moreover, the impact of various exogenous variables, specifically unsystematic risk along with systematic risk, has not been analyzed on ex – dividend abnormal returns particularly in the context of Pakistan. Generally, stock prices decrease with an amount less than dividend on ex – dividend day. Such price discrepancies may attract traders and arbitrageurs to earn quick profit and result in abnormal returns. Panel data is used covering the time span of twenty years 2001 – 2020. Diagnostic tests have been applied to check the normality of data. The Hausman test is used to choose between fixed effect and random effect model. Further, Breusch and Pagan Lagrangian multiplier test is used to decide between pooled regression model and random effect model. Based on the obtained results, fixed effect model is considered appropriate choice for making prudent conclusions. Impact of various exogenous factors is examined through fixed effect regression model. Abnormal returns are calculated with the help of the market model. Our regression results revealed that dividend yield, transaction cost, systematic risk and firm age have crucial and significant impact on ex–dividend day abnormal returns. The ex-dividend day anomaly, a phenomenon that greatly affects trading methods, would also be clearly illustrated for dividend-capture and capital-gain traders, who could benefit most from this study. They can optimize their trading methods to maximize returns and minimize potential risks by considering the variables causing this anomaly. Institutional stakeholders will also benefit greatly from this research because they may use it to improve the way they manage their portfolios and create innovative investment and trading plans.