Capital Structure and the Ex-Dividend Day Return

This paper proposes the application of an option-pricing framework to the ex-dividend behavior of common stocks. This framework explains the observed behavior of positive returns on the ex-dividend day and predicts that ex-dividend day returns will be higher for firms with greater financial leverage. An empirical test using observed ex-day returns and firm financial data confirms that there is a positive relationship between leverage and the ex-day return. Tests also control for and confirm the importance of effects of other variables on ex-dividend day behavior. In contrast to results of prior studies, we find that dividend capture activity has no significant impact on ex-dividend behavior, and we offer an explanation for this based on the importance of tick intervals