The Limits to Dividend Arbitrage: Implications for Cross Border Investment

Rodney L. White Center for Financial Research Working Paper No. 08-03

30 Pages Posted: 25 Jun 2003

See all articles by Susan Kerr Christoffersen

Susan Kerr Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

David K. Musto

University of Pennsylvania - Finance Department

Date Written: May 23, 2003

Abstract

The economic significance of the tax on cross-border dividends depends on the limits to dividend arbitrage. In the case of Canadian payments to the U.S. we observe these limits exactly because we see the actual pricing of the dividend-arbitrage transactions. These transactions recover only some withholding, so that Canadian and non-tax U.S. accounts perceive different expected returns from Canadian stocks, where the difference increases with dividend yield. The resulting difference in expected utility of wealth is small but the difference in efficient portfolio weights is potentially large and increasing in yield, and the actual difference between Canadian and U.S. holdings of Canadian stocks is large and increasing in yield. Governments may thus take advantage of robust financial markets to boost domestic governance of domestic firms at a low utility cost, though this may be more preferable for zero-dividend firms, whose governance moves abroad.

Suggested Citation

Christoffersen, Susan E. and Reed, Adam V. and Geczy, Christopher Charles and Musto, David K., The Limits to Dividend Arbitrage: Implications for Cross Border Investment (May 23, 2003). Rodney L. White Center for Financial Research Working Paper No. 08-03, Available at SSRN: https://ssrn.com/abstract=413867 or http://dx.doi.org/10.2139/ssrn.413867

Susan E. Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416 946 5647 (Phone)
416 971 3048 (Fax)

HOME PAGE: http://www.rotman.utoronto.ca/schristoffersen

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

David K. Musto (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
377
Abstract Views
3,108
Rank
143,798
PlumX Metrics