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Capital Gains Taxes and Asset Prices: Capitalization or Lock-in?

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  • ZHONGLAN DAI
  • EDWARD MAYDEW
  • DOUGLAS A. SHACKELFORD
  • HAROLD H. ZHANG

Abstract

This paper demonstrates that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock-in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock-in effect in the week after the rate reduction became effective. Copyright 2008 by The American Finance Association.

Suggested Citation

  • Zhonglan Dai & Edward Maydew & Douglas A. Shackelford & Harold H. Zhang, 2008. "Capital Gains Taxes and Asset Prices: Capitalization or Lock-in?," Journal of Finance, American Finance Association, vol. 63(2), pages 709-742, April.
  • Handle: RePEc:bla:jfinan:v:63:y:2008:i:2:p:709-742
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • G1 - Financial Economics - - General Financial Markets
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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