The behaviour of share prices around the ex-dividend day for selected Maltese listed companies : analysis and implications for investors

Abstract

Purpose: The behaviour of share prices around the ex-dividend date has been a bone of contention in the finance world for the best part of the last five decades. This dissertation first sets out to investigate whether local ex-dividend day share prices reacted in the same manner as is commonly advocated in foreign literature, i.e. via a price drop equivalent to the cash dividend paid. It also seeks to understand the extent of such a price reaction and whether this can be statistically predicted. In addition, an analysis of trading volumes around this date is made so as to assess the presence and implications of any abnormal patterns of volume. This quantitative study is the first of its kind in the local scene. Design and Methodology: The objectives of this dissertation were achieved through a number of research tools, namely a multiple regression model, paired and independent samples t-tests as well as one-way ANOVA tests. The most liquid dividend-paying firms were selected for the analysis. Findings: This study establishes that, despite the inefficiencies imposed by the Maltese stock market, the long-run ex-dividend date price drop is comparable to most foreign markets. This drop can also be statistically predicted. The reform of the local dividend imputation tax system in 2007 appears to have had an observable effect on the extent of the price drop, albeit not a statistically significant one. There is also weak evidence of short-term trading around the ex-dividend date. As a result, a substantial part of the local ex-dividend date puzzle has been unravelled.