The impact of the disposition effect on the ex-dividend day price drop : An empirical study of the Swedish stock market

Abstract Background: The dividend ex-day effect is the tendency of the stock price drop on the ex-day to be less than the dividend per share. This inclination is contrary to established theory of rational investor behaviour and is, thus, considered an anomaly in capital markets. The phenomenon was first observed more than half a century ago and has puzzled researchers ever since, resulting a myriad of theories trying to explain its cause. Nevertheless, the dividend ex-day effect still stands without a conclusive explanation. In Sweden, few studies have been conducted and none succeeds in explaining the phenomenon. In a recent addition to the many explanatory theories, Efthymiou and Leledakis (2014) propose the disposition effect as the driving factor behind the dividend ex-day effect. Compelling evidence for this notion is provided in an empirical study of the US market, warranting the consideration of a similar investigation in the Swedish market. Purpose: The purpose of this study is to examine the relationship between the dividend ex-day effect and the disposition effect in the Swedish stock market. Method: This study is conducted using a deductive approach and a quantitative research strategy. Secondary data of OMXS stocks during the 2013-2017 period is gathered from Thomson Reuters Datastream. To fulfil the purpose, one sample t-tests and regression analyses are performed. Conclusion: Statistically significant results confirm that there is a pervasive dividend ex-day effect on the OMXS market. From here, it is found that there is a substantial difference in the price drop between stocks based on their performance: winning stocks display a higher price drop on the ex-day compared to losing stocks. Regression analyses indicate a positive relationship between the dividend ex-day effect and the disposition effect. Some evidence, although not statistically significant, suggest that for a specific stock, the price drop will be greater in times when the stock has had positive returns compared to when it has had negative returns. A remarkable finding in this study is that all tests indicate that the positive relationship between the dividend ex-day effect and the disposition effect appears to be fading out as the holding period of stocks gets longer