Stock Liquidity and Ex-dividend Period Returns in Finland in 1993-2001

This study examines the ex-dividend period stock price behavior in Finland, and its dependence on the liquidity of the stock. The theory is strongly based on the early studies by Elton and Gruber (1970) and Kalay (1982). The empirical study follows Stickel's (1991) work with American data. The data consists of dividend-paying Finnish stocks in the period from 1993 to 2001. The event window includes the days from -5 to +5 relative to the ex-dividend day. Average trading volume of the stock is used as measure of liquidity. The effect of liquidity is tried to separate from the effect of market returns, dividend yield, risk and tick size. Hypotheses are tested with t-test and regression analysis. The results show that illiquid stocks provide abnormal returns on the ex-dividend days, whereas liquid ones do not. The reason is probable that short-term trading tends to eliminate arbitrage opportunities with liquid stocks, and pricing of illiquid stocks is somewhat incorrect. Furthermore, the effect of dividend payment on the stock prices is quick within liquid stocks, but spread over several days within illiquid stocks. There occur also abnormally high trading volumes during the event.