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We empirically test whether the disposition effect, the inclination of investors to sell winning stocks more readily than losing stocks, has an asymmetrical impact on the price adjustment on the ex-dividend day. Using aggregate market data for a sample of ordinary taxable dividends of common stocks listed in NYSE and AMEX during the 2001-2008 period, we employ the capital gains overhang proxy to measure accrued gains or losses for individual stocks. We find that stocks with accrued gains have a higher market adjusted price drop than stocks with accrued losses on the ex-dividend day. Moreover, there is a significantly positive relationship between the ex-day price drop and the capital gains overhang. Both results are attributed to the disposition effect since active (limited) selling by holders of winning (losing) stocks will most likely speed up (restrain) the downward price adjustment on the ex-dividend day. We also contribute to the ex-dividend day literature, insofar as we propose a new factor, namely, the past accrued gain or loss, to explain the time-series variation of the ex-day price drop ratio for a particular stock that can be a winner or a loser at different times. Our results remain robust to various ex-day price drop measures, panel data models adjusting for both stock and time correlations, and different investor holding period lengths assumed.

The Price Impact of the Disposition Effect on the Ex-Dividend Day of NYSE and AMEX Common Stocks