226 Int. J. Indian Culture and Business Management, Vol. 19, No. 2, 2019 Copyright © 2019 Inderscience Enterprises Ltd. Do stock markets witness instantaneous reactions to changes in dividend tax laws?: Evidence from India Shobhit Aggarwal* Indian Institute of Management Udaipur, Balicha, Rajasthan 313001, India Email: Shobhit.aggarwal@iimu.ac.in *Corresponding author Mrityunjay Kumar Tiwary Indian Institute of Management Lucknow, Prabandh Nagar, Lucknow, Uttar Pradesh 226013, India Email: mrityunjay@iiml.ac.in Abstract: In this paper, we examine whether the dividend tax law changes in India in 2002 cause any instantaneous stock price reactions. Using high frequency data, we devise a novel method to segregate the impact of a particular stimulus from a series of stimuli. We show that investors did not react instantaneously to the dividend tax law changes. We examine four alternative explanations for this result: first, the demand for dividend paying stocks by tax-advantaged investors is matched by the supply from tax-disadvantaged investors. Second, markets are not efficient to depict any instantaneous reaction. Third, our methodology cannot isolate the effect of a single announcement made as part of a series of announcements. Lastly, there is a time lag before we witness investor reactions. Our results rule out all four alternative explanations. We conclude that dividend taxes are not an important criterion for investors to effect instantaneous stock price reactions. Keywords: dividend tax effect; dividend tax clienteles. Reference to this paper should be made as follows: Aggarwal, S. and Tiwary, M.K. (2019) ‘Do stock markets witness instantaneous reactions to changes in dividend tax laws?: Evidence from India’, Int. J. Indian Culture and Business Management, Vol. 19, No. 2, pp.226–243. Biographical notes: Shobhit Aggarwal is currently working as an Assistant Professor in Finance and Accounting Department at the Indian Institute of Management Udaipur, India. He teaches corporate finance, corporate valuation and capstone simulation course. His research interests include dividend policy, earnings quality and inter-disciplinary management research. Mrityunjay Kumar Tiwary is currently working as an Assistant Professor in the Finance and Accounting Department, Indian Institute of Management Lucknow, India. He teaches financial accounting, management accounting, and financial management to post graduate management students. His research interests include banking, financial markets, accounting theory and inter-disciplinary management research.