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Intertemporal Tax Discontinuities

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  • Douglas A. Shackelford
  • Robert E. Verrecchia

Abstract

This paper defines an intertemporal tax discontinuity (ITD) as a circumstance in which different tax rates are applied to gains and losses realized at one point in time versus some other point in time, and studies the effects of ITDs on market behaviors at the time of disclosures of firm performance. The results show that ITDs either depress or amplify trading volume at the time of disclosure, depending upon whether the disclosure is 'good news' or 'bad news,' repectively, and lead to 'overreactions' in price changes independent of the 'news.' We propose empirical tests of one intertemporal tax discontinuity, the spread between short-term capital gains tax rates and long-term capital gains tax rates. We predict that stock responses to disclosures, such as quarterly earnings announcements, increase in the difference between short- term and long-term capital gains tax rates.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7451.

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Date of creation: Dec 1999
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Publication status: published as Shackelford, Douglas A. and Robert E. Verrecchia. "Intertemporal Tax Discontinuities," Journal of Accounting Research, 2002, v40(1,Mar), 195-222.
Handle: RePEc:nbr:nberwo:7451

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  1. Joseph E. Stiglitz, 1983. "Some Aspects of the Taxation of Capital Gains," NBER Working Papers 1094, National Bureau of Economic Research, Inc.
  2. Balcer, Yves & Judd, Kenneth L, 1987. " Effects of Capital Gains Taxation on Life-Cycle Investment and Portfolio Management," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 743-58, July.
  3. Klein, Peter, 1999. "The capital gain lock-in effect and equilibrium returns," Journal of Public Economics, Elsevier, Elsevier, vol. 71(3), pages 355-378, March.
  4. William A. Reese, Jr., 1998. "Capital Gains Taxation and Stock Market Activity: Evidence from IPOs," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1799-1819, October.
  5. Guenther, David A. & Willenborg, Michael, 1999. "Capital gains tax rates and the cost of capital for small business: evidence from the IPO market," Journal of Financial Economics, Elsevier, Elsevier, vol. 53(3), pages 385-408, September.
  6. James M. Poterba, 2001. "Capital Gains Tax Rules, Tax-loss Trading, and Turn-of-the-year Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 353-368, 02.
  7. 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.
  8. Poterba, James M., 1987. "How burdensome are capital gains taxes?: Evidence from the United States," Journal of Public Economics, Elsevier, Elsevier, vol. 33(2), pages 157-172, July.
  9. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, Econometric Society, vol. 51(3), pages 611-36, May.
  10. George M. Constantinides, 1983. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns," NBER Working Papers 1176, National Bureau of Economic Research, Inc.
  11. Ritter, Jay R, 1988. " The Buying and Selling Behavior of Individual Investors at the Turn of the Year," Journal of Finance, American Finance Association, American Finance Association, vol. 43(3), pages 701-17, July.
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Cited by:
  1. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 127-178, December.
  2. Eichfelder, Sebastian & Lau, Mona, 2014. "Capital gains taxes and asset prices: The impact of tax awareness and procrastination," arqus Discussion Papers in Quantitative Tax Research 170, arqus - Arbeitskreis Quantitative Steuerlehre.
  3. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2000. "Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act," NBER Working Papers 7827, National Bureau of Economic Research, Inc.
  4. Richard J. Rendleman, Jr. & Douglas A. Shackelford, 2003. "Diversification and the Taxation of Capital Gains and Losses," NBER Working Papers 9674, National Bureau of Economic Research, Inc.
  5. Wu, Yuliang & Li, Youwei, 2011. "Long-term return reversals--Value and growth or tax? UK evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(3), pages 347-368, July.
  6. Zhonglan Dai & Edward Maydew & Douglas A. Shackelford & Harold H. Zhang, 2006. "Capital Gains Taxes and Asset Prices: Capitalization or Lock-In?," NBER Working Papers 12342, National Bureau of Economic Research, Inc.
  7. Niemann, Rainer & Sureth, Caren, 2009. "Investment effects of capital gains taxation under simultaneous investment and abandonment flexibility," arqus Discussion Papers in Quantitative Tax Research 77, arqus - Arbeitskreis Quantitative Steuerlehre.
  8. Jin, Li & Kothari, S.P., 2008. "Effect of personal taxes on managers' decisions to sell their stock," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 46(1), pages 23-46, September.
  9. Eichfelder, Sebastian & Lau, Mona, 2014. "Capital gains taxes and asset prices: The impact of tax awareness and procrastination," Discussion Papers 2014/17, Free University Berlin, School of Business & Economics.
  10. Shackelford, Douglas A. & Shevlin, Terry, 2001. "Empirical tax research in accounting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 321-387, September.
  11. Jacob, Martin, 2011. "Tax Regimes and Capital Gains Realizations," Working Paper Series, Center for Fiscal Studies 2011:9, Uppsala University, Department of Economics.
  12. Gries, Thomas & Prior, Ulrich & Sureth, Caren, 2007. "Taxation of risky investment and paradoxical investor behavior," arqus Discussion Papers in Quantitative Tax Research 26, arqus - Arbeitskreis Quantitative Steuerlehre.
  13. Claudio Agostini & Mariel C. Siravegna, 2009. "Efectos de la Exención Tributaria a las Ganancias de Capital en el Precio de las Acciones en Chile," ILADES-Georgetown University Working Papers, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines inv233, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  14. Hanlon, Dean & Pinder, Sean, 2007. "An empirical investigation of whether Australian capital gains tax reforms influence individual investor behaviour," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 15(5), pages 481-493, November.

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