Intraday Analysis of the Limit Order Bias on the Ex-Dividend Day of U.S. Common Stocks

This study reexamines Dubofsky's (1992) limit order adjustment hypothesis via an intraday analysis of minute-by-minute trade and quote data recorded on the ex-dividend days of common stocks listed on the NYSE, AMEX, and NASDAQ. According to Dubofsky's (1992) model, the asymmetric adjustment of open limit orders for cash dividend payments under NYSE and AMEX rules is sufficient to create abnormal returns on the ex-dividend day. Our empirical evidence shows that the limit order bias arising from the asymmetric limit order adjustment strongly influences the overnight ex-day returns, but it is significantly corrected via active trading until the close of the ex-dividend day. As a result, the significant association of the ex-day price drop discrepancy with the opening limit order bias eventually dissipates before the ex-dividend day close. We conclude that the explanatory power of this microstructure model over the price drop discrepancy at the ex-day close is much less than that suggested by earlier literature on the ex-dividend day