Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes

It is well documented that stock prices on ex-dividend days drop by less than the value of the dividend, on average. This has commonly been attributed to the effect of tax clienteles. We examine data from the Hong Kong stock market, where neither dividends nor capital gains are taxed. As in the U.S., the average stock price drop is less than the value of the dividend; specifically, the average dividend for the period 1980-1993 is HK $0.12 and the average price drop is HK $0.06. We are able to account for this both theoretically and empirically through market microstructure arguments.