Price adjustment method and ex-dividend day returns in a different institutional setting

This study investigates the determinants of the ex-dividend day price behavior in the Athens Stock Exchange (ASE), a unique institutional setting, and examines how a major regulatory change in the price adjustment method affects the extent of the ex-day stock price drop. We find that allowing the market to freely adjust prices, after 2001, the ex-dividend day price improves the pricing efficiency of the market in the sense that the raw price ratio tends to one and abnormal returns tend to zero. We also find that in the absence of taxes on dividends and capital gains and certain microstructure impediments discussed in the literature - i.e., bid-ask spread, market makers, price discreteness, tick size and limit order adjustment mechanism - stock illiquidity is the best candidate for explaining the magnitude of the ex-dividend day price adjustment.