Ex Day Effects of the 2003 Dividend Tax Cut

We analyze ex day dynamics around the May 2003 dividend tax cut in a framework with arbitrageurs as liquidity providers. Raw returns and ratios for all groups do not change significantly around the event, but the volatilities decline significantly. The volume declines more (less) strongly for high (low) yields. This is consistent with the reduction in the differential tax rates leading to a reduced demand for capital losses around the ex day, and a reduction in informed trading. The price dynamics for the one week before and after periods also support a market microstructure explanation. Evidence on market quality is mixed