This paper investigates the behavioral responses of ex-dividend day stock prices in the Taiwan Stock Exchange, following the 1998 introduction of the Imputation Tax System (the integration of business income tax and individual income tax). The results reveal that after the adoption of the new tax system, there was an increase in the average excess return of stock purchases on the day prior to ex-dividend, and selling on the next day, both at the closing price. Evidence also supports the bargain-hunting hypothesis (Lee, 1991), that the excess return is positively correlated to the level of the dividend distributed, but negatively correlated to the ratio of the ex-dividend price to the cum-dividend price. This paper also documents the clear, positive relationship between the excess return and the imputation tax credit ratio.
