On the Ex-Dividend Date, Is It Really Okay to Scoop Up Shares?

Among stock communities and investment blogs, one of the “surefire” methods that pops up regularly is so-called ex-dividend-date trading.
“Buy when the price drops on the ex-dividend date and aim for a short-term rebound,” “Even if you sell right after receiving the dividend, you’ll still make money”—these lines sound like a sweet temptation, as if you’ve uncovered a hidden secret of the market. In reality, many investors are curious about this strategy and seriously consider trying it when dividend season comes around.

On one side, some insist that “ex-dividends are science,” claiming that they offer a statistically proven opportunity for short-term gains. On the other, critics warn that this is “what people say when they don’t understand taxes and fees,” adding that “if it were that easy to make money, everyone would already be rich.” Faced with such starkly opposing arguments, individual investors are left confused about whom to trust.

This piece aims to put an end to that never-ending debate. We will dig into whether this ex-dividend trading strategy can truly grow an investor’s account, or whether it is merely a numerical trap dressed up to look convincing. To uncover the truth, we will comb through academic papers published by leading universities and financial institutions around the world, as well as real-world data.

Before we dive into specific strategies, let’s firmly establish the concept of the ex-dividend, which underpins all of our discussion.

Dividend investing always comes with a set of three dates: the record date, the ex-dividend date, and the payment date.

Given these definitions, it is natural for the stock price to fall on the ex-dividend date.
A dividend is cash taken out of the company’s coffers and distributed to shareholders, which reduces the company’s asset value by that amount.
Theoretically, if the company pays a dividend of $1 per share, the stock price on the ex-dividend date should fall by exactly $1.

Now that we understand the basics, let’s look at how investors try to turn this ex-dividend event into a money-making opportunity. In the market, there are two main ex-dividend strategies that people commonly talk about.

You are absolutely right to point that out.
For the dividend capture strategy we are about to challenge to make sense, a single premise must hold: the stock price must fall by less than the dividend amount. If that premise is false, then dividend capture is not even worth discussing as a strategy.

So is that premise actually true? Surprisingly, the academic answer is “yes.”

Decades of accumulated data clearly show the statistical reality of what is known as the ex-dividend anomaly, where stock prices move differently from theory on the ex-dividend date. A key metric used to measure this is the dividend drop-off ratio (DOR). When this number is less than 1, it means the stock price has fallen by less than the dividend amount.

According to research, in the U.S. market the DOR has often averaged between 0.8 and 0.9. On a pre-tax basis, this clearly suggests the existence of a predictable “excess return.”

This is precisely why so many investors fall for the allure of dividend capture. Because the phenomenon is documented in the data, they come to believe they can profit from it.
The “buying the dip on the ex-dividend date” strategy is also tied to this anomaly, fueling the expectation that prices will soon recover.

But is this really a signal of opportunity for individual investors?

Because they believe that only when price swings are large enough do opportunities for profit arise, both in theory and in practice they target high-dividend stocks that fall sharply.

Here lies a critical pitfall that “dividend capture” strategists overlook. According to a study by Chowdhury and Sonaer (2016), the higher the dividend yield, the lower the total return (dividend yield + price change) on the ex-dividend date. In other words, the very “high-dividend stocks” that investors find most attractive actually delivered worse real-day P&L on the ex-dividend date—a shocking result.

So why does this phenomenon occur? Why does the market seem to impose a kind of “penalty” on high-dividend stocks? From here on, we will dig into the root causes through three key lenses—“taxes,” “market structure,” and “human psychology”—and rigorously test the strengths and weaknesses of both strategies.

Within the reasons why prices fall less lies the answer to why the “dividend capture” strategy is a trap for individuals, and within the factors that shape the price recovery process lies the answer to why “buying the ex-dividend day dip” is an unpredictable gamble. All of these drivers, once understood, become the most powerful logic for seeing through the illusions of both strategies.

The starting point: Elton & Gruber (1970)’s classic study

The most classic and powerful theory explaining the “ex-dividend anomaly” is by far the “Tax Effect Hypothesis.” This hypothesis was opened up by the pioneering 1970 study of Elton and Gruber, whose logic begins with understanding the historical context of the time.

In the 1960s United States, when this study was conducted, the tax discrimination between dividend income and capital gains was far more extreme than it is today. For individual investors, dividend income was treated as ordinary income, subject to marginal tax rates that could exceed 70% depending on income level. By contrast, long-term capital gains from selling stocks held for more than six months were taxed separately at much lower rates, capped around 25%.

This tax structure, with gaps of more than 40 percentage points at times, sent a clear signal to rational investors.

That is the point. This obvious imbalance is the starting point of the theory that explains the “anomaly.”

The logic of the “indifference equilibrium equation” – understanding it without the math
Elton & Gruber assumed that if the “marginal investor”—the investor who participates in the last trade that sets the market price—is rational, equilibrium will be reached where after-tax returns are equalized. Right before the ex-dividend date, this investor faces two choices.

Elton & Gruber’s theory was further refined into the concept of the “dividend clientele effect.” Not all investors face the same tax environment. The market is made up of diverse clienteles.

Institutions vs. individuals: preferences split by tax treatment

The reality of “tax-avoidance trading” (Lakonishok & Vermaelen, 1986)
These different investor clienteles trade actively around the ex-dividend date.
Lakonishok & Vermaelen’s study found that trading volume spikes abnormally around ex-dividend dates. This is evidence that “tax-avoidance trading” is actually taking place, where high-tax investors sell shares to low-tax investors before the ex-dividend date, and the low-tax investors receive the dividend and then sell the shares back afterward. The buying and selling pressure generated in this process also affects stock prices.

Even such a powerful tax-effect hypothesis cannot explain everything.

In conclusion, the tax-effect hypothesis shows that the phenomenon of “smaller price drops” is not a free lunch for individual investors, but rather a sophisticated equilibrium mechanism in the market that primarily compensates low-tax investors such as institutions for their tax advantages.

Therefore, when an individual investor facing a high dividend income tax rate tries to squeeze into this delicate equilibrium and profit from a dividend capture strategy, it is essentially
like entering a game whose rules were designed from the outset to favor institutions, but doing so under disadvantageous conditions. A price that “falls less” is not an “opportunity” created to hand you profits; it is much closer to an “outcome” in which the market has already priced in the taxes you will have to pay.

There is no doubt that the tax effect is a powerful hypothesis for explaining ex-dividend behavior, but it cannot be the whole story. As noted earlier, anomalies are observed even in markets without taxes.

So who is the culprit? Scholars have identified another cause in the “playing field” where stock trading takes place itself—in the invisible rules of market microstructure.

When we buy goods, we can calculate prices down to the last won, but stock prices do not move that smoothly. Prices in the stock market can only move in increments of the minimum price change set by the exchange, known as the tick size.

In today’s U.S. equity market, the tick size is generally $0.01 (one cent). This “digital,” stepwise pricing system is one of the fundamental sources of anomalies.

Jakob & Whitby’s study clearly demonstrated that the impact of tick size differs depending on the price level of the stock.

The impact of market structure becomes even more complex and interesting in stocks that trade across multiple markets rather than just a single one. A representative example is when shares of a company listed on the Hong Kong Stock Exchange trade in the U.S. market in the form of ADRs (American Depositary Receipts).

According to research, ADRs of Hong Kong companies go ex-dividend first in the U.S. market, but at that point the price only partially drops—by about 30% of the dividend amount.

Then, a few days later, when the original shares listed in Hong Kong go ex-dividend in the local market, the ADR price finally falls further so that the total drop almost matches the dividend amount.

This kind of "delayed price adjustment" arises from mismatched trading hours due to the 13–14 hour time difference between the U.S. and Hong Kong, as well as inefficiencies in how information is transmitted between the two markets. There are structural constraints that make it difficult for arbitrageurs to immediately eliminate these price discrepancies.

In conclusion, market microstructure shows that price movements around the ex-dividend date are not as clean and predictable as we might assume. A "buy the ex-dividend dip" strategy is built on the belief that prices will predictably "rebound," but in reality mechanical factors unrelated to investors’ analysis—such as tick-size constraints or time-zone gaps across markets—distort prices and introduce noise.

The dividend-capture strategy also relies on exploiting tiny price differences, yet these structural frictions in the market make even those small arbitrage opportunities unpredictable or wipe them out altogether. In the end, the market’s own "rules" create an environment in which it is extremely difficult for individual investors’ short-term strategies to succeed.

So far, we have analyzed how taxes and structural frictions in the market affect ex-dividend behavior. But at the end of the day, markets are created by the aggregation of countless human decisions. Behavioral finance is the field that studies how this very human irrationality moves markets, and it holds the final key to the ex-dividend puzzle.

The market, almost like a living organism, has a collective mood. There are optimistic periods when everyone expects prices to rise, and pessimistic periods when fear dominates. The study by Paudel, Silveri, and Wu uses data to show that this market mood—investor sentiment—directly affects stock prices on the ex-dividend date.

According to their research, when investor sentiment—measured using indicators such as the VIX index or first-day IPO returns—is optimistic, the price drop on the ex-dividend date shrinks by an additional 8% relative to normal. When market participants are filled with the belief that "prices will keep going up," they tend to shrug off the dividend-induced price decline or even see it as a buying opportunity, keeping buying pressure intact. This psychological effect is especially pronounced in small-cap and growth stocks, where volatility is high and valuation is more uncertain.

Beyond collective sentiment, several cognitive traps—behavioral biases—embedded in our minds also encourage irrational investment decisions around the ex-dividend date.

Are these psychological biases limited to naïve retail investors? They are not. Guerrero’s study analyzes the options market, where some of the most sophisticated investors operate.
Option prices embed the market’s collective expectations about future stock prices, and remarkably, options market participants also anticipate that stock prices will fall by less than the dividend amount on the ex-dividend date and price this in.

In conclusion, behavioral factors in finance make it even harder to predict stock price movements around the ex-dividend date. The quick rebound expected by the “buy the dip on ex-dividend day” strategy means that price action may be driven not by company fundamentals, but by the fickle mood of market participants.
Also, the phenomenon of stock prices falling less than the dividend amount—which underpins the “dividend capture” strategy—may well be an irrational outcome born from a mix of investor illusions and biases.

Ultimately, a strategy that tries to earn short-term profits based on this kind of unpredictability and irrationality in human psychology is closer to gambling on the market’s mood than to a systematic investment approach.

The long analysis so far may have felt a bit complicated. Now let’s use the simplest and most definitive method—direct calculation—to grade the final scorecard of the dividend capture strategy.

The long analysis so far may have felt a bit complicated. Now let’s use the simplest and most definitive method—direct calculation—to grade the final scorecard of the dividend capture strategy.

Using a high-dividend stock as the base case, we end up with a tiny profit of 5 cents per share. So is this strategy actually viable? We’re not done yet. Once we factor in the foreign exchange spread that we have not yet included in the calculation, even this $0.05 profit will almost certainly converge to zero or flip back into a loss.

In conclusion, the expected return from taking on all kinds of risks (such as the risk that the stock price falls more than the dividend, or execution risk) and dealing with the hassle of complex tax filings ends up being just a few cents at best—or more likely, a loss. It is hard to call this a rational investment.

So what about the second strategy, “buying the dip on ex-dividend day”? This strategy also contains a logical trap.

The key is to interpret correctly what a “smaller price drop” actually means. If the stock price falls by only $0.8, less than the $1 dividend, and ends up at $99.20,

then, viewed the other way around, it means that “even though you no longer have the right to receive the dividend, the stock is still trading above its theoretical price ($99)”.
In other words, the ex-dividend day price is not a “bargain sale” price; if anything, it may be a price with a “slight premium” attached due to various factors.

Also, as we saw earlier, the subsequent price recovery is heavily influenced by unpredictable factors such as market frictions and investor sentiment, which are unrelated to fundamentals. This is closer to a short-term gamble that relies on “luck in betting on the market’s mood” than to a systematic investment.

The conclusion is clear. For individual investors, short-term trading around the ex-dividend date is closer to a guaranteed-loss strategy built on a statistical illusion.

To summarize once more:

As we have seen, the “ex-dividend day short-term trading” strategy may exist in theory, but in practice it is structured in such a way that it is extremely difficult for individual investors to make money from it.