Capital Structure and the Ex-Dividend Day Return

We apply an option-pricing framework to the ex-dividend behavior of common stocks. The framework explains the observed behavior of positive returns on the ex-dividend day and predicts that ex-dividend day returns will be higher for firms with greater financial leverage. Empirical testing supports the prediction. In contrast to prior studies, we find that dividendcapture activity has no significant impact on ex-dividend behavior, and we offer an explanation based on the importance of tick intervals.