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Capital gains tax and individual trading: The case of Japan

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  • Hayashida, Minoru
  • Ono, Hiroyuki
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    Abstract

    Japan implemented a capital gains tax reform and reduced its flat rate in 2003. This study attempts to explain how this has contributed to the recent surge of individual trading, using three different methods of analysis. First, we perform a time-series analysis with the aggregate, market-level data. Second, we use firm-level, by-stock data to conduct a similar time-series analysis, as well as a panel data analysis. Third, we examine the price-change sensitivity of winners' volume before and after the reform. The results clearly indicate that the tax cut has helped expand individual trading, as the average tax rate negatively correlates significantly with individual trading.

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    Bibliographic Info

    Article provided by Elsevier in its journal Japan and the World Economy.

    Volume (Year): 22 (2010)
    Issue (Month): 4 (December)
    Pages: 243-253

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    Handle: RePEc:eee:japwor:v:22:y:2010:i:4:p:243-253

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    Web page: http://www.elsevier.com/locate/inca/505557

    Related research

    Keywords: Capital gains tax Japan Stock market Individual trading;

    References

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    1. Zoran Ivković & James Poterba & Scott Weisbenner, 2005. "Tax-Motivated Trading by Individual Investors," American Economic Review, American Economic Association, vol. 95(5), pages 1605-1630, December.
    2. Epps, Thomas W, 1975. "Security Price Changes and Transaction Volumes: Theory and Evidence," American Economic Review, American Economic Association, vol. 65(4), pages 586-97, September.
    3. Martin Feldstein & Joel Slemrod & Shlomo Yitzhaki, 1981. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," NBER Working Papers 0250, National Bureau of Economic Research, Inc.
    4. Noronha, Gregory & Ferris, Stephen P., 1992. "Capital gains tax policy and the behavior of common stock returns," Economics Letters, Elsevier, vol. 40(1), pages 113-117, September.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    6. Bremer, Marc & Kato, Kiyoshi, 1996. "Trading Volume for Winners and Losers on the Tokyo Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 127-142, March.
    7. Dyl, Edward A, 1977. "Capital Gains Taxation and Year-End Stock Market Behavior," Journal of Finance, American Finance Association, vol. 32(1), pages 165-75, March.
    8. Henderson, Yolanda K., 1990. "Capital Gains Tax Rates and Stock Market Volume," National Tax Journal, National Tax Association, vol. 43(4), pages 411-25, December.
    9. Karpoff, Jonathan M, 1986. " A Theory of Trading Volume," Journal of Finance, American Finance Association, vol. 41(5), pages 1069-87, December.
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