| This study investigates the impact of foreign withholding taxes on ex-dividend trading activity of American Depositary Receipts (ADRs). Examination of tax motivated ex-dividend day trading should enhance our understanding of how taxes, combined with other economic variables, impact investor behavior, particularly with respect to marketable securities.; For several reasons, studying ADR dividend distributions provide a unique setting to address this issue. First, the foreign and domestic tax structures related to these distributions allow a more direct measure of the magnitude of the related tax incentive than is possible in single jurisdiction studies. Furthermore, cross-sectional variation in tax rates exists and can be identified with respect to these distributions, making possible joint tests of the tax and non-tax factors affecting trading activity.; Two separate volume analyses are conducted on a sample of 940 ADR dividend distributions occurring between 1988–1995: (1) univariate daily analyses of trading activity in the week prior to and after the ex-dividend day, and (2) multivariate joint tests of the tax and non-tax factors affecting trading volume. In general, the daily analyses indicate abnormal increases in trading volume, for distributions subject to foreign withholding, beginning one day prior to and extending several days after the ex-dividend day. Non-taxable distributions do not exhibit the same increases in ex-dividend day trading volume.; The multivariate tests provide evidence that trading volume, for a short window around the ex-dividend day, is positively related to the magnitude of the foreign withholding tax and negatively related to transaction costs. Further investigation suggests these results are not sensitive to variable definition, exchange listing, country of origin, or year of distribution. Overall, the results provide evidence consistent with the hypothesis—foreign withholding taxes do impact ex-dividend day trading activity of ADRs and this activity is constrained by transaction costs. |
