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Capital gains taxes and the market response to public announcements in an indexation-based tax regime

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  • Clinch, Greg
  • Odat, Mahmoud

Abstract

This paper addresses the impact of capital gains taxes on the market price and trading volume response to public announcements in an indexation-based tax regime. Our analysis indicates that indexation makes share prices more responsive to public announcements. Moreover, ‘over responsiveness’ induces negative correlation between short-term price changes around the public announcement and subsequent long-term price movements. This effect is greater when anticipated inflation is higher. Our analysis also indicates that trading volume is increasing in price changes around the public announcement.

Suggested Citation

  • Clinch, Greg & Odat, Mahmoud, 2012. "Capital gains taxes and the market response to public announcements in an indexation-based tax regime," Journal of Contemporary Accounting and Economics, Elsevier, vol. 8(2), pages 53-63.
    • Handle: RePEc:eee:jocaae:v:8:y:2012:i:2:p:53-63
    DOI: 10.1016/j.jcae.2012.06.001
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    References listed on IDEAS

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    1. Douglas A. Shackelford & Robert E. Verrecchia, 2002. "Intertemporal Tax Discontinuities," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 205-222, March.
    2. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 302-321.
    3. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(1), pages 109-126, March.
    4. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2003. "Capital Gains Taxes and Equity Trading: Empirical Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 41(4), pages 611-651, September.
    5. Li Jin, 2006. "Capital Gains Tax Overhang and Price Pressure," Journal of Finance, American Finance Association, vol. 61(3), pages 1399-1431, June.
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