The empirical observation that stock prices fall on ex-dividend days by significantly less than the amount of the dividend has been often interpreted

Question

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This phenomenon is known as the "dividend puzzle" and is primarily attributed to the tax effect in dividend valuation. When a stock pays a dividend, its price is adjusted downward by the amount of the dividend, but because of the preferential tax treatment of dividends, investors may still value the stock more highly than before, leading to a smaller overall decrease in price on ex-dividend days.

The Empirical Observation That Stock Prices Fall on Ex-Dividend Days