Institutional investor ownership and tax-induced trading of American depositary receipts

This work is the first tax-induced empirical research that examines how investor tax homogeneity simultaneously affects ex-dividend day trading returns and volumes. Previous studies employ U.S. stocks that are investor tax heterogeneous to test tax-induced behaviors. However, regulatory tax heterogeneity induces diverse trading strategies for various investors who are subject to differential tax obligations. The heterogeneity of the investors makes it difficult for previous studies to summarize how tax affects the investors behaviors. Therefore, the innovation of this work in terms of data selection is to focus on American Depository Receipts (ADRs) which are investor tax homogeneous in order to examine whether tax on dividends will induce investors transactions during ex-dividend days. Furthermore, this study is the first in utilizing three-stage least squares (3SLS) and genetic algorithms to simulate the impact of institutional holding, tax rate, dividend yield, transaction cost, and risk factors on the ADR excess trading. The model-base management system we have constructed employs institutional ownership of ADR as an indicator for investor tax homogeneity to prove how investor tax homogeneity induces consistent trading strategy around ex-dividend day. Our analysis results provide convincing insights not only on investors rational tax-induced strategy, but also on implications for legislating tax policies in financial instruments.