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Intertemporal Tax Discontinuities

  • Douglas A. Shackelford
  • Robert E. Verrecchia

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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File URL: http://www.nber.org/papers/w7451.pdf
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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
Note: PE
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  1. Poterba, James M., 1987. "How burdensome are capital gains taxes?: Evidence from the United States," Journal of Public Economics, Elsevier, vol. 33(2), pages 157-172, July.
  2. Joseph E. Stiglitz, 1983. "Some Aspects of the Taxation of Capital Gains," NBER Working Papers 1094, National Bureau of Economic Research, Inc.
  3. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-36, May.
  4. James M. Poterba & Scott J. Weisbenner, 1998. "Capital Gains Tax Rules, Tax Loss Trading and Turn-of-the-Year Returns," NBER Working Papers 6616, National Bureau of Economic Research, Inc.
  5. 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.
  6. Cutler, David M, 1988. "Tax Reform and the Stock Market: An Asset Price Approach," American Economic Review, American Economic Association, vol. 78(5), pages 1107-17, December.
  7. William A. Reese, Jr., 1998. "Capital Gains Taxation and Stock Market Activity: Evidence from IPOs," Journal of Finance, American Finance Association, vol. 53(5), pages 1799-1819, October.
  8. Balcer, Yves & Judd, Kenneth L, 1987. " Effects of Capital Gains Taxation on Life-Cycle Investment and Portfolio Management," Journal of Finance, American Finance Association, vol. 42(3), pages 743-58, July.
  9. Ritter, Jay R, 1988. " The Buying and Selling Behavior of Individual Investors at the Turn of the Year," Journal of Finance, American Finance Association, vol. 43(3), pages 701-17, July.
  10. Klein, Peter, 1999. "The capital gain lock-in effect and equilibrium returns," Journal of Public Economics, Elsevier, vol. 71(3), pages 355-378, March.
  11. 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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