After-Tax Excess Return on the Ex-Dates and the Hypothesis of Bargain Hunting in Taiwan and China’s A-share Market
Date Issued
2015
Date
2015
Author(s)
Chi, Xiaohong
Abstract
There is a so-called “Ex-right Effect” In Taiwan stock market, which means that the stock prices tend to have abnormal changes before and after the ex-dates, leading to abnormal return on ex-dates. Meanwhile, stocks with “high stock dividend” in China’s A-share market are also extremely popular in recent years. In Taiwan, the imputation tax system has been implemented since 1998. And starting from 1/1/2013, the investors in Taiwan must pay a 2% National Health Insurance (NHI) supplementary premium for any single dividend receipt higher than 5,000 NTD. Also from 1/1/2013, China established a new tax policy to differentiate the individual income tax on dividend income based on the holding period of the related shares. This paper studied the companies which announced cash or stock dividends during 2013-2014 period in both Taiwan and China’s A-share market, to prove whether investors can earn after-tax excess return, by buying shares on the day before the ex-dates, and selling on the ex-dates, both at the closing price. The results show that significant positive abnormal return on the ex-dates exists in Taiwan stock market. But net of round trip transaction costs, security transaction tax and the incremental income tax, only individual investors with marginal tax rate at 5% and below could have significant positive excess return. While in China’s A-share market, the average abnormal return on the ex-dates is significantly negative, therefore investors in A-share market cannot make profit by taking the one-day holding strategy. Additionally, for the reasons that caused the abnormal return on ex-dates in Taiwan market, the conclusions of this paper support the Hypothesis of Bargain Hunting proposed by Lee (1991, 1994): The higher the stock dividend rate, the lower the stock price after the ex-right (ex-dividend), letting investors to believe that the stock is underpriced, therefore attracting more buying forces and resulting in the abnormal return on ex-dates.
Subjects
ex-right and ex-dividend
after-tax excess return
hypothesis of bargain hunting
imputation tax system
NHI supplementary premium
Type
thesis
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