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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.

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    $\begingroup$ Do you have an example of a dividend cancellation after the ex-dividend date on US markets? $\endgroup$ May 7, 2023 at 13:33

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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.

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    $\begingroup$ At the start of the pandemic, all UK banks (incl. HSBC) were told by the FCA to suspend dividend payments. This was also applied to other financial institutions such as insurers. In the UK on the London Stock Exchange, Synthomer plc had an interim dividend announced on 2-Aug-2022 with ex-div date of 6-Oct-2022 and record date of 7-Oct-2022 to be paid out on 4-Nov-2022. On 12-Oct-2022 they suspended the dividend including future dividends until end of 2023. Are you suggesting that interim dividends may be cancelled after the ex-div date but for final dividends this is almost impossible? $\endgroup$
    – s5s
    May 8, 2023 at 12:36
  • $\begingroup$ At least on the US, cancelling final dividends is almost impossible as shown in the reference I provided. Wouldn't you agree that it is a very unlikely circumstance that dividends were suspended during Covid. In exceptional times like these, pretty much everything is possible. E.g. the Swiss government agreed to change legislation that bypasses shareholder approval in the case of Credit suisse (a different subject but it shows nothing is certain in life). $\endgroup$
    – AKdemy
    May 8, 2023 at 13:08
  • $\begingroup$ I agree that it is unusual to cancel dividends. However, it is precisely when these events happen that you want accurate valuations. My question is - why not discount at the payment date? What's the point of price going out on ex-dividend? $\endgroup$
    – s5s
    May 9, 2023 at 22:15
  • $\begingroup$ A stock trades. If you are certain to not get the dividend, why would you pay for it? Hence the price drops. Out of hundreds of thousands of stocks, a handful sometimes may not end up paying. The only example you have are from a pandemic that was so exceptional that' something similar didn't happen for about a hundred years. Synthomer shares tumbled when it announced to suspend dividends (-13%, down 79% 12m change).Or put differently, do you prefer your firm to survive or pay a small dividends and go bankrupt, which usually means you will not get any more money from your stock going forward. $\endgroup$
    – AKdemy
    May 10, 2023 at 2:35
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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.

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    May 8, 2023 at 8:27

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