Is the conventional wisdom that traders can scalp part of cash dividends by buying stocks just before ex-dividend day and selling just after reliable across exchanges? In their January 2014 paper entitled “Ex-Dividend Day Stock Price Behavior – the NASDAQ Evidence”, Shishir Paudel and Sabatino Silveri investigate whether dividend-paying NASDAQ stocks exhibit ex-dividend day price behaviors similar to those of more closely studied dividend-paying NYSE stocks. They measure ex-dividend day price drops with the price-drop ratio (PDR), the ratio of the change in stock price to the amount of the cash dividend. Using a sample of 49,325 (90,867) cash dividends for NASDAQ (NYSE) stocks during 1983 through 2011 (ignoring dividends less than $0.05), they find that:
- On average, NASDAQ and NYSE samples have similar dividend yields, intervals between dividend announcement and ex-dividend date and distributions across days of the week and months of the year.
- On average, prices of NASDAQ dividend payers drop by less than the dividend amount on ex-day, but only half as much as for NYSE stocks as measured by PDR. Average PDR for NASDAQ (NYSE) stocks is 42% (85%), with median 37% (91%).
- Capital gain tax implications, trading frictions and trading by special groups do not explain the small size of ex-day price drops for NASDAQ dividend payers.
- When stocks switch from NASDAQ to NYSE, their average PDR increases to become NYSE-like, suggesting that NASDAQ (NYSE) investors place less (more) emphasis on dividends. Specifically, the average PDR for a subsample of stocks that move voluntarily from NASDAQ to NYSE increases from 42% during the year before the move to 86% during the year after.
In summary, evidence suggests that dividend-capturing traders may find the NASDAQ exchange a more profitable environment than the NYSE.
Cautions regarding findings include:
- Since opportunities may cluster, portfolio-level attractiveness of a dividend capture strategy requires detailed analysis of capital deployment over time.
- Indicated magnitudes of dividend “scalps” are gross, not net. Trading frictions would reduce these returns. Moreover, since NASDAQ dividend payers tend to be smaller than NYSE dividend payers, frictions may tend to be higher for the former.
