I show that there are significant abnormal returns on the third business day before the dividend payment days for the dividend paying stocks traded on NYSE, AMEX and NASDAQ during 1998-2008. I argue that the abnormal returns three days before the payment day are a result of the tendency of investors to reinvest the dividends of a stock to buy more shares of the same stock. The T+3 settlement rule for stock trades makes it possible for these investors to give buy orders to their brokers three days before the payment day for a trade to be settled on the dividend payment day. The dividend amount to be received on the payment day can be used by the broker to settle the trade on the payment day. Evidence from high-frequency trades confirms that the abnormal returns are indeed a result of the price-pressure due to dividend reinvestments.
YADAV, V. (2011). The settlement period effect in stock returns around the dividend payment days.