Dividend effects in Israel: a puzzle

We examine whether stock returns on ex-dividend days in the Tel Aviv Stock Exchange (TASE) reflect the differential taxation of dividends and capital gains. TASE data offer significant advantages over data used by prior studied: less frictional trading and identifiable tax rates. We find that stock prices on the TASE on ex-dividend days exhibit significant abnormal returns. Surprisingly, we find no evidence of short-term trading around ex-dividend days to exploit these profit opportunities.