The Ex-Day Price Behavior of REITs : Taxes or Ticks?

Taxes and microstructure constraints are often cited as possible explanations for why stock prices drop by less than the dividend on their ex-dates. Using a sample of REITs, which have no significant correlation between dividend size and yield, we find that close-to-open ex-dividend price drops are related to dividend size as suggested by the microstructure models, but close-to-close price drops are related to dividend yield as predicted by the tax theory. These results imply that overnight price drops are primarily determined by microstructure, but that trading during the ex-day causes prices to adjust to reflect individual tax preferences