Market Microstructure for a Portfolio of Dividend Paying Firms around Ex-Dividend Days

This thesis contributes to the existing literature on market microstructure by presenting three essays on the market microstructure around ex-dividend days. The first essay studies the market microstructure “footprints” associated with trading and tax-arbitrage activity around ex-dividend day using a sample of FTSE 100 stocks. Specifically, the first essay asks whether bid-ask spreads, price volatility and order submission strategies change as stocks transition to the ex-dividend day. From the results there is evidence of the presence of both tax- arbitrageurs and liquidity suppliers around ex-dividend day. Furthermore, the findings support that increases in spread, volatility, return and execution probability around ex-dividend day attract liquidity suppliers and tax-arbitrageurs. The second essay investigates whether the lack of liquidity prevents the presence of ex-dividend trade activities, and how the behaviour of tax-arbitrage traders, if there are any, could affect bid-ask spreads, price volatility and order submission strategies using a sample of FTSE SmallCap stocks. The results show that illiquidity seems not to prevent tax-arbitrage activities altogether. Although, the findings suggest effects associating order submission to spread, volatility and to return, they do not support any effect associating order submission to execution probability. The third and final essay analyses intraday patterns related to bid-ask spread, trade volume and price volatility around the ex-dividend day for a sample of FTSE 100 companies. The results show that volume towards the end of the trading day is .greater .both on ex- and cum-dividend days, among firms that are the most attractive targets for tax-arbitrage. The findings show that the spread towards the end of the day is greater both on ex-dividend and cum-dividend days also though here the effect is confined to the last half hour of the trading day for the firms that are the most attractive targets for tax-arbitrage. The classification of whether a firm is an attractive target for tax-arbitrage is based on whether the price impact less than a specified threshold. Finally, the results and patterns noted above become masked in the large pool comprising all firms because the effects that are identified for firms that are the most attractive targets for tax-arbitrage are offset by the effects that are identified for the firms that are the least attractive targets for tax arbitrage.