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Dividend Arbitrage

Dividend arbitrage is a trading strategy that exploits tax-advantaged cash flows thanks to different countries’ tax treatments of dividends. This entry explains the two main maneuvers to effect dividend arbitrage, and it reflects on the concerns about dividend arbitrage.

A dividend is a distribution of a portion of a firm’s earnings to a given class of its shareholders. Dividends can be paid in the form of cash, shares, or other financial assets, and the timing and the amount of the payment are determined by the board of directors.

The underlying rationale behind the payment of dividends, instead of reinvesting the earnings to obtain higher capital gains, is the bird-in-hand argument according to which investors place a higher value on a monetary unit of current dividends that they ...

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