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Did ACRS Really Cause Stock Prices to Fall?

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  • Andrew B. Lyon

Abstract

This paper tests the hypothesis that the introduction of the Accelerated Cost Recovery System in 1981 caused a reduction in stock prices by reducing the value of existing capital. A second hypothesis that these depreciation changes benefited firms by increasing the return from new investment is also examined. Stock returns during the period surrounding enactment of this legislation are evaluated with data on capital stock and investment for over 800 firms. The empirical results suggest that neither hypothesis is an important determinant of cross-sectional differences in returns during this period. Differences in stock returns are in the direction predicted by the second hypothesis, but the relationship is not statistically significant. A test of the joint effects of both hypotheses operating simultaneously is supported by the data, but this relationship is also not statistically significant.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2990.

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Date of creation: May 1989
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Handle: RePEc:nbr:nberwo:2990

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  1. Downs, Thomas W & Tehranian, Hassan, 1988. "Predicting Stock Price Responses to Tax Policy Changes," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 1118-30, December.
  2. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1985. "Long-run Effects of the Accelerated Cost Recovery System," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 363-72, August.
  3. Cutler, David M, 1988. "Tax Reform and the Stock Market: An Asset Price Approach," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 1107-17, December.
  4. Alan J. Auerbach & Laurence J. Kotlikoff, 1982. "Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts," NBER Working Papers 1027, National Bureau of Economic Research, Inc.
  5. Andrew B. Lyon, 1988. "The Effect Of The Investment Tax Credit On The Value Of The Firm," NBER Working Papers 2537, National Bureau of Economic Research, Inc.
  6. Roger H. Gordon & James R. Hines, Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Chapters, National Bureau of Economic Research, Inc, in: The Effects of Taxation on Capital Accumulation, pages 223-258 National Bureau of Economic Research, Inc.
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