dividende and stock price

guillaume07 · June 29th, 2007, 6:51 pm

hello,why a stock price lose an amount of money equal to the dividendafter this one has been distributed ?thanks

quantmeh · June 29th, 2007, 7:27 pm

QuoteOriginally posted by: guillaume07hello,why a stock price lose an amount of money equal to the dividendafter this one has been distributed ?thankssimple present value. if u accept that the stock price is equal to present value of future cashflows (i dont), then right after the dividend your present value should decrease by amount of dividend. i think that empirical evidence is not very affirmative of this phenom, but it's somewhat in that direction

guillaume07 · June 30th, 2007, 5:58 pm

but it seems that is it perfectly the case , several person told me that, is it false ?we can only say that if we accept the argument that you have explained (present value of futur cashflows) ?thanks

villiger · July 1st, 2007, 6:59 am

The argument is no arbitrage. If S-pre<S-post + dividend then buy S and you win S-post+dvidend-S-pre>0, otherwise sell S.Of course, you can say that this varies each time, but on average S-pre=S-post+dividend by this argument.Actually, the price will be reduced by the post-tax value of the dividend, but this does not change the principle. Empirical evidence is relatively poor, because the dividends most often are quite small compared to the market capitalisation of a company. This way the effect is dominated by the offer-demand noise.

guillaume07 · July 1st, 2007, 8:41 am

great, thanks