Taxes and Ex-Day Returns : Evidence from Germany and the U.K

I analyse the tax systems and tax reforms in Germany and the U.K. and test the hypothesis that ex-day returns are related to each country's tax differential between dividends and capital gains. The results indicate that in the U.K., where this tax differential is high and short-term trading is regulated, ex-day returns are higher, and the market microstructure and short-term trading impacts are weak. In contrast, in Germany, the tax impact is mitigated by short-term trading and market microstructure effects. The results suggest that despite their dividend tax similarities, the institutional differences between the two countries lead to different determinants of ex-day returns