Under U.S. regulations, the differential tax obligations for investors with various status and income levels give rise to investor heterogeneity. In contrast to tax dividend income imposed on U.S. stocks, foreign tax liability is the minimums of the taxation imposed on American depositary receipt (ADR) dividend income. Identical foreign tax rates enable ADR investors to be more homogenous in taxation than U.S. stock holders. The characteristics are likely to enable investors to sell ADRs before cash dividend distributions and repurchase ADRs on ex-dividend dates. As expectations, our analysis exhibits prominent excess returns and excess volume on ADR ex-days. This implies that heavy foreign tax liability simultaneously causes excess returns and excess volumes on ADR ex-dividend days (ex-days). The 3SLS estimation further supports the view that ADR ex-day excess returns are causally and positively related to excess volume. In particular, the ex-day excess returns are significantly associated with dividend yields, transaction costs and risk factors. This suggests the tax-induced returns constrained by transaction costs and firm’s risks.
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