What drives the devil’s machine? : an empirical study on dividend withholding taxes, settlement changes, and legislative changes’ effect on trading around the ex-dividend date in European markets.

Abstract

This thesis explores the dividend withholding tax (DWT) schemes related to changes in the general DWT rate, the effect of imposing a DWT on investors, settlement cycles, and legislative measures to limit the DWT schemes. Through our analyses of 14 different countries from 2004 to 2020, we have found no significant effect on abnormal volume caused by the changes in the general DWT rate. This contrasts our hypothesis; that higher general DWT rates will lead to a higher level of abnormal volume caused by DWT schemes. However, we find significant increases in excess volume when a DWT is imposed on the investors. We also included two supplementary research problems: The effect on abnormal volume caused by a transition from T+3 to T+2 standard settlement cycle is inconclusive. Our analysis provides no new insights into DWT schemes when analysing excess volume before and after the transition. The countries that have between 2004 and 2020 implemented legislative measures to combat DWT schemes generally seem to have achieved the desired effect. All countries except Denmark, Norway and Switzerland show a significant decrease in abnormal volume following the new regulatory framework.