Dividend Stripping, Risk Exposure, and the Effect of the 1984 Tax Reform Act on the Ex-Dividend Day Behavior

This article investigates the importance of risk exposure and the effects of the 1984 Tax Reform Act on the ex-dividend day behavior. The tax reform appears to have inhibited short-term trading activities by increasing the risk exposure of incorporated traders. Moreover, stocks for which existing listed options permitted the reduction of risk through hedged dividend-stripping strategies were affected much less from the new tax code than their nonoptionable counterparts. This implies that risk affects investors' dividend yield choice and that the ex-dividend day behavior may be caused, in part, by the existence of risk premia.