Are Dividend Arbitrage Strategies Present in Asia? An empirical study on cum-cum and cum-ex transactions in Asian markets

Abstract

This thesis investigates whether dividend arbitrage strategies are present in Asian markets. The term refers to trading schemes where investors collude to exploit loopholes related to dividend withholding taxes. We focus on two variations of these strategies, known as cum-cum and cum-ex transactions, which have caused substantial tax losses in Europe. Our sample consists of the ten largest stock exchanges in Asia, spread across a total of nine countries. We conduct a review of dividend taxation in these countries and determine that the tax laws in four of them provide incentives for investors to engage in dividend arbitrage strategies. We use an event study methodology to analyse whether abnormalities in share turnover and short sales occur around ex-dividend dates for the 25 largest companies on each stock exchange during the period from 2012 to 2022. Our findings indicate that dividend arbitrage strategies are mostly absent in Asian markets. However, we find indications that they may be present in Taiwan and Japan. For Taiwan, we find that share turnover increases by 48% immediately before the ex-dividend date. Similarly, we find that short selling in Japan increases by 72.5%, but the evidence is inconsistent on a yearly basis. In contrast to that of Europe, it appears that legislations in most Asian countries are effective in preventing exploitation of dividend withholding taxes. Nonetheless, our findings suggest that Taiwan and Japan might be an exception.