Ex-Dividend Trading Deadlines and Limit Order Book Liquidity

Andrew B. Ainsworth, Adrian D. Lee
2011 Social Science Research Network  
Recently developed theoretical models suggest a link between order aggressiveness, spreads and waiting time. We directly test these models using an experimental setting where waiting time is likely to be important for traders, namely the ex-dividend day. Consistent with theoretical predictions, we show that order placement is more aggressive before stocks begin trading ex-dividend and that spreads decline. Stocks with higher expected costs of delaying execution experience larger declines in
more » ... r aggressiveness from the cum-day to the ex-day. Waiting costs also impact effective bid-ask spreads, which fall on the cum-day before rising on the ex-day. Abstract Recently developed theoretical models suggest a link between order aggressiveness, spreads and waiting time. We directly test these models using an experimental setting where waiting time is likely to be important for traders, namely the ex-dividend day. Consistent with theoretical predictions, we show that order placement is more aggressive before stocks begin trading ex-dividend and that spreads decline. Stocks with higher expected costs of delaying execution experience larger declines in order aggressiveness from the cum-day to the ex-day. Waiting costs also impact effective bid-ask spreads, which fall on the cum-day before rising on the ex-day.
doi:10.2139/ssrn.1769404 fatcat:resinjhjdfhdzgyz5vnwua6vfu