Testing for Multiple Types of Marginal Investor in Ex-Day Pricing

The observed changes in share prices at the ex-dividend day have led researchers to look for a single marginal investor, either a long or a short term trader with different tax status, dominating all trades to explain the ex-day pricing in different markets. This paper provides a model which extends this research in three directions. One, it allows for the possibility that different types of traders may influence different stocks, thereby generating a separating equilibrium. Two, it identifies an additional marginal investor who has the option of being taxed as a short term or long term trader. Three, it explicitly models the fact that it can take a considerable time from when a dividend based trade is made until taxes have to be paid on that trade. A unique data set from New Zealand is used for the empirical analysis. Evidence of a separating equilibrium with at least two types of marginal investors is found.