Effects of Imputation Tax on Ex-Dividend Price Drop in Taiwan

According to the efficient market hypothesis and the arbitrage theory where there are no taxes, transaction costs and imputation credits, the ex-dividend price drop of the stock should be equal to the value of the dividend.hether this price drop accurately reflects the established financial theories has been debated by many researchers. Some believe that the market is sufficiently efficient to be explained by the hypotheses. Others believe that investor behavior and preferences will influence the price drop on the ex-dividend date.his paper analyzes the effects of the introduction of the imputation tax system on the behavior of dividend price drops in Taiwan from 1995 to 2001. We found that there is a shift in trend for more companies to distribute cash dividends, and that the ex-dividend price drop ratio increased which suggests that shareholders increased their value of dividends relative to capital gains.