The behaviour of Canadian income trust funds during the ex-distribution day period

This paper examines a sample of 89 Canadian Income Trust Funds to test the relevance of two possible explanations of ex-dividend day pricing: the tax clientele hypothesis, which highlights the marginal tax rates of long-term investors; and the short-term hypothesis, which relies on dividend capture activities of securities dealers and other short-term traders. Canadian Income Trust Funds are well suited for studying these two hypotheses due to the tax treatment of the income distributions and to the size and regularity of the dividend payments. The empirical results indicate that the tax clientele hypothesis, the short-term trading hypothesis, and the market microstructure hypothesis all play a part in explaining the ex-distribution day price behaviour of Canadian Income Trust Funds.