Price and Volume Behavior around the Ex‐dividend Day: Evidence on the Value of Dividends from American Depositary Receipts and their Underlying Australian Stocks^*

Abstract

Australian residents are tax-advantaged, relative to American investors, in their access to imputation tax credits on Australian stocks. This paper provides evidence consistent with a difference in dividend valuations between Australian stocks and their American Depositary Receipts (ADRs). The ex-dividend drop-off ratio is lower for ADRs relative to their underlying Australian stocks and this difference is most pronounced for stocks that have imputation tax credits and high dividend yields. Consistent with dividend capture trading in the Australian market, the difference in drop-off ratios is driven by both temporarily higher Australian cum-prices and temporarily lower Australian ex-prices. Abnormal trading volume about the ex-day is present in both markets and in the Australian market the abnormal volume is greater for dividends with imputation tax credits. Dividend-related trading leads to price differences across the markets on the ex-dividend day. Price differences are also observed when the stock and the ADR trade with different dividend entitlements due to different ex-dividend dates.

Lost in translation: Delayed ex-dividend price adjustments of Hong Kong ADRs

“…In this respect, it is similar to the recent study of Australian ADRs conducted by Jun et al (2008). The ex-dates for the stocks and the ADRs differ due to differences in settlement periods and, occasionally, holder-of-record dates.…”

“…The cum-dividend period is the period before either ex-date and the ex-dividend period is the period on or after the second ex-date. Jun et al (2008) report that the ratio of ex-day price drop to dividends for Australian ADRs is smaller compared to that for the underlying stocks. The mean (median) price drop ratio for ADRs in their sample is 0.14 (0.29); for the underlying stock the mean (median) price drop ratio is 0.86 (0.97).…”

“…To the best of our knowledge, there is only one other similar study. Jun et al (2008) report that the ratio of the ex-day price drop to dividends is significantly higher for Australian stocks compared to their ADRs. Important features of the Australian tax code complicate assessment of the ex-day behavior of Australian ADRs and their underlying stock.…”

Taxes, International Clienteles and the Value of ADR Dividends

“…For ADRs on Australian stocks an ex‐dividend study by Jun et al. () finds the reverse result. Dividend valuations appear to be dominated by the Australian tax regime in the home market, but not in the ADR market.…”

“…() use a set of control variables and it is an open question whether the results of Jun et al. () are robust to the application of similar controls. By analysing the valuation of Australian ADR dividends using our new approach, using similar controls to Kadapakkam et al.…”