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Market Valuation of Tax-Timing Options: Evidence from Capital Gains Distributions

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Author Info

  • J. B. CHAY
  • DOSOUNG CHOI
  • JEFFREY PONTIFF

Abstract

We examine a distribution that is taxed as a capital gain rather than as a dividend. Since the distribution induces a realized capital gain while the price change is an unrealized gain, ex-day return behavior provides evidence of the value of tax-timing capital gains. We show that investors are compensated 7� in unrealized gains for each dollar of realized capital gains, that is, $1 of realized capital gains is equivalent to 93� of unrealized gains. An investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%. Copyright 2006 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00856.x
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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 2 (04)
Pages: 837-865

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Handle: RePEc:bla:jfinan:v:61:y:2006:i:2:p:837-865

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Cited by:
  1. Harry Huizinga & Johannes Voget & Wolf Wagner, 2012. "International Taxation and Cross-Border Banking," Working Papers 1225, Oxford University Centre for Business Taxation.
  2. Rydqvist, Kristian & Spizman, Joshua & Strebulaev, Ilya, 2009. "The Evolution of Aggregate Stock Ownership - A Unified Explanation," SIFR Research Report Series 68, Institute for Financial Research.
  3. Rydqvist, Kristian & Spizman, Joshua & Strebulaev, Ilya, 2011. "The evolution of aggregate stock ownership," CFS Working Paper Series 2011/18, Center for Financial Studies (CFS).
  4. Harry Huizinga & Johannes Voget & Wolf Wagner, 2008. "International Taxation and Takeover Premiums in Cross-border M&As," Working Papers 0809, Oxford University Centre for Business Taxation.
  5. Dahlquist, Magnus & Robertsson, Göran & Rydqvist, Kristian, 2006. "Direct Evidence of Dividend Tax Clienteles," CEPR Discussion Papers 6005, C.E.P.R. Discussion Papers.
  6. Woodrow T. Johnson & James M. Poterba, 2008. "Taxes and Mutual Fund Inflows Around Distribution Dates," NBER Working Papers 13884, National Bureau of Economic Research, Inc.
  7. Clemens Sialm, 2009. "Tax Changes and Asset Pricing," American Economic Review, American Economic Association, vol. 99(4), pages 1356-83, September.
  8. Day, Theodore E. & Li, George Z. & Xu, Yexiao, 2011. "Dividend distributions and closed-end fund discounts," Journal of Financial Economics, Elsevier, vol. 100(3), pages 579-593, June.
  9. Kristian Rydqvist & Joshua Spizman & Ilya A. Strebulaev, 2011. "Government Policy and Ownership of Financial Assets," NBER Working Papers 17522, National Bureau of Economic Research, Inc.
  10. Dahlquist, Magnus & Robertsson, Göran & Rydqvist, Kristian, 2007. "Direct Evidence of Dividend Tax Clienteles," SIFR Research Report Series 51, Institute for Financial Research.
  11. repec:dgr:uvatin:2012100 is not listed on IDEAS

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