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

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

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.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2008.01329.x
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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 2 (04)
Pages: 709-742

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Handle: RePEc:bla:jfinan:v:63:y:2008:i:2:p:709-742
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  1. 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, vol. 53(3), pages 385-408, September.
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