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Do Tax Sensitive Investors Liquidate Appreciated Shares After A Capital Gains Tax Rate Reduction?

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  • Chyz, James A.
  • Li, Oliver Zhen
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    Abstract

    Using data on institutional investors’ portfolio composition before and after the capital gains tax rate cut in the Taxpayer Relief Act of 1997, we find evidence that, relative to less tax sensitive institutional investors, tax sensitive institutional investors are more willing to sell appreciated equity in response to the rate cut. Further, the reduction in value invested in appreciated equity appears to be lasting, consistent with the tax rate cut lowering tax sensitive investors’ impediments to optimally balancing their portfolios. These results provide direct evidence of a capital gains tax lock-in effect.

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    Bibliographic Info

    Article provided by National Tax Association in its journal National Tax Journal.

    Volume (Year): 65 (2012)
    Issue (Month): 3 (September)
    Pages: 595-627

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    Handle: RePEc:ntj:journl:v:65:y:2012:i:3:p:595-627

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    1. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
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    8. Klein, Peter, 1998. "The capital gain lock-in effect with short sales constraints," Journal of Banking & Finance, Elsevier, vol. 22(12), pages 1533-1558, December.
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    11. Ivkovic, Zoran & Weisbenner, Scott, 2009. "Individual investor mutual fund flows," Journal of Financial Economics, Elsevier, vol. 92(2), pages 223-237, May.
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    Cited by:
    1. Sikes, Stephanie A., 2014. "The turn-of-the-year effect and tax-loss-selling by institutional investors," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 22-42.

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