Nasdaq ex-day behavior: An out-of-sample test

We test various explanations of the ex-dividend day price anomaly using Nasdaq-listed firms. Similar to NYSE-listed firms, on average the prices of Nasdaq-listed firms drop by less than the dividend amount. However, the average Nasdaq price-drop is substantially smaller than what existing theories would predict and translates to an imputed dividend tax rate that is double the maximum tax rate. We thus find little support for the tax hypothesis. We also find little support for the short-term trading hypothesis and various other explanations. The significant disconnect we document between Nasdaq dividends and price changes seems to support the “free dividends fallacy.”