Ex-Dividend Date Stock Price Behaviour in the German Market : A study on German stock price behaviour around the ex-dividend date, pre- and post the 2016 tax reforms

Abstract

In recent years, European tax authorities have been defrauded out of billions of euros in a highly controversial securities trading scheme. The trading scheme in question is known as cum – cum and cum-ex trading, in which investors would take advantage of favorable tax legislation to gain illicit tax refunds. As a result, several European countries have been cracking down on the problem by changing and tightening their tax policies to combat these practices.

Our thesis investigates the new legislation's impact on stock prices during this period, focusing on whether and how investors have reacted to the changes. Specifically, we examine the stock price movements on ex-date, a period that has been particularly favorable for foreign investors. As they have previously been able to achieve a tax-credit refund and avoid paying the DWT tax by utilizing the cum – cum trading scheme.

We carried out an event study to explore if the price movements in the pre- and post-period have been affected. Specifically, we investigate whether the new legislation's impact on stock prices is due to a shift in investor behavior and tax preferences. Analyzing the 100 most traded stocks on the German stock exchange and gathered data on daily stock prices from 2012 to 2018, we perform regressions on the daily change in stock price 60 days prior and 50 days after the stock goes ex-dividend. Our findings show that the stock price did not reduce significantly at the start of the holding period, contrary to expectations. Furthermore, the stock price reduces significantly on the ex-date for all regressions, but the reduction in stock price differs depending on the sample. The coefficient of the decrease in stock price aligns closely with the expected value of a partial tax credit refund for foreign investors. Contrary to our expectations we find no evidence of a price premium at the start of the holding period. However, we find evidence of changing investor preferences, which hints to a clientele effect.

The new tax legislation in Germany has affected the stock market, as it has altered the price reduction observed once the stock goes ex-dividend. While we notice a change in investors' preferences, we still fail to find a clear link between the holding period and a change in stock price.