Why do we need an ex-dividend date? [closed]

Question

Why do we need an ex-dividend date? What is the problem with the ex-dividend date being the same as the payment date? Why are they separate? What problem does having a separate ex-dividend date solve?

For example, at the moment - a company announces a \$1 dividend on 12 May with ex-div date of 12 June and a payment date of 12 July. The stock price goes down by \$1 on the ex-dividend date of 12 June. The money goes out of the company to investors on 12 July. Between 12 June and 12 July, the stock is cheaper by $1 because it has been discounted (ex-div) but the money is still in the company's bank accounts.

What problem does this extra (ex-div) date solve? I can only see it introducing a risk or a mismatch because a company is entitled to cancel the dividend distribution past the ex-dividend date and not pay it out. I agree it is rare but it happens and is legal and possible. The only date where we are 100% sure that a dividend is in fact paid out or not (and the stock price should go down by \$1) is on the payment date when the money goes from of the company's account into the shareholders accounts.

Answer 1

I think you are really concerned about the record date. The ex-dividend date itself is set by the exchange. See for example Nasdaq.

The firm issuing the stock manages the declaration date, record date and payout date, but the exchange sets the ex-dividend date...

...the New York Stock Exchange (NYSE) would set the ex-dividend date for March 13 to allow time for trade settlement. The NYSE sets most ex-dividend dates and other exchanges follow in lockstep.

This is similar to other settlement dates that exist with most transactions.

Generally speaking I think it's extremely unlikely a company will cancel a dividend. For final dividends, this is anyhow pretty much impossible.See for example ffslaw:

Once the board of directors has lawfully declared a dividend for each shareholder entitled to receive it, the board may not revoke it or withhold dividend distribution without the consent of each such shareholder.

Furthermore,

Setting the payment date rests within the sound discretion of the board of directors. Normally, it is set within 30-60 days following the “record date,” to allow a reasonable period for administrative preparation to make dividend distributions.

Therefore, the reason for the time gap is to allow some admin time. It's extremely unlikely any company will cancel already declared dividends unless they get into severe trouble or regulators push them towards it, as was the case with HSBC for example, see info.gov.hk.

Answer 2

The ex-dividend date is the date on or after which a buyer of a stock is not entitled to receive the next dividend payment. The purpose of the ex-dividend date is to ensure that the buyers and sellers of a stock share the responsibility of paying taxes on any dividends paid by the company.

If the ex-dividend date were the same as the payment date, buyers would be entitled to receive the dividend even if they held the stock for only a short period of time before selling it. This could lead to an unfair situation where some investors would receive the benefit of the dividend without bearing the tax burden associated with it, while others would have to pay taxes without receiving the benefit.

By setting an ex-dividend date, the company ensures that only those shareholders who owned the stock before that date are entitled to the dividend. This allows for a fair distribution of the tax burden and prevents investors from engaging in short-term trades to take advantage of dividend payouts.

Regarding the risk of the company cancelling the dividend distribution after the ex-dividend date, it is true that this is possible. However, this is generally a rare occurrence and is typically only done in exceptional circumstances, such as a significant decline in the company's financial position. In general, companies try to avoid cancelling dividends once they have been announced, as it can damage their reputation with investors.