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Capital Gains Taxes and Stock Reactions to Quarterly Earnings Announcements

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  • Jennifer L. Blouin
  • Jana Smith Raedy
  • Douglas A. Shackelford

Abstract

This paper examines the impact of capital gains taxes on equity pricing. Examining three-day cumulative abnormal returns for quarterly earning announcements from 1983-1997, we present evidence consistent with shareholders' capital gains taxes affecting stock price responses. To our knowledge, this is the first study to link shareholder taxes and share price responses to earnings releases. The results imply that shares trade at higher (lower) prices when individual investors face incremental taxes (tax savings) created by selling appreciated (depreciated) shares before they qualify for long-term treatment. Unlike prior studies that have focused on price reactions in settings where shareholder taxes are unusually salient (e.g., tax law changes, turn-of-the-year trading, or tax-sensitive transactions), this study finds the imprint of capital gains taxes in a more general setting.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7644.

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Date of creation: Apr 2000
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Publication status: Published as "The Lock-In Effect of Capital Gains Taxes: Evidence from the RJR Nabisco Leveraged Buyout", National Tax Journal, Vol. 48, no. 2 (1995): 245-259.
Handle: RePEc:nbr:nberwo:7644

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  1. Amoako-Adu, Ben & Rashid, M. & Stebbins, M., 1992. "Capital gains tax and equity values: Empirical test of stock price reaction to the introduction and reduction of capital gains tax exemption," Journal of Banking & Finance, Elsevier, Elsevier, vol. 16(2), pages 275-287, April.
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Cited by:
  1. 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.

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