The Effect of Dividend on Stock Returns in Chinese Market: Is There a Clientele Phenomenon?

Abstract

We study the ex-dividend day price behavior in China stock market, specifically how the share price react to this event. Our major findings are consistent with the tax hypothesis. With higher dividend yield, investors care more about the tax effect and the price reacts significantly different from the theoretical way. With low dividend yield, the price differs statistically insignificant from the theoretical value, which implies as dividend yield gets smaller, the tax effect seems to be more ineffective. Different from previous studies, the price drops more in China market than the dividend amount, unexplainable by the tax clientele hypothesis.