Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act
This paper exploits an unusually powerful setting to explore a choice many individual investors face regularly the decision to sell today or postpone selling until lower rates are available in the future. We examine trading volume and stock returns around the 1998 reduction in the holding period required for individual investors to receive the most favorable long-term capital gains tax rate. For firms whose initial public shareholders were affected by the legislation, we find trading volume increasing and share returns decreasing in past price performance on the day the legislation was publicly disclosed. The results are consistent with capital gains holding periods distorting markets sufficiently that if investors are permitted to liquidate appreciated positions at favorable rates, enough will sell immediately to move prices. To our knowledge, this is the first study linking trading volume and security prices to a change in capital gains holding periods.
|Date of creation:||Aug 2000|
|Date of revision:|
|Publication status:||published as Blouin, Jennifer L., Jana Smith Raedy and Douglas A. Shackelford. "Capital Gains Taxes And Equity Trading: Empirical Evidence," Journal of Accounting Research, 2003, v41(4,Sep), 611-651.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Douglas A. Shackelford & Robert E. Verrecchia, 1999.
"Intertemporal Tax Discontinuities,"
NBER Working Papers
7451, National Bureau of Economic Research, Inc.
- 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.
- James M. Poterba, 2001. "Capital Gains Tax Rules, Tax-loss Trading, and Turn-of-the-year Returns," Journal of Finance, American Finance Association, vol. 56(1), pages 353-368, 02.
- Landsman, Wayne R. & Shackelford, Douglas A. & Yetman, Robert J., 2002. "The determinants of capital gains tax compliance: evidence from the RJR Nabisco leveraged buyout," Journal of Public Economics, Elsevier, vol. 84(1), pages 47-74, April.
- Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2000. "Capital Gains Taxes and Stock Reactions to Quarterly Earnings Announcements," NBER Working Papers 7644, National Bureau of Economic Research, Inc.
- Klein, Peter, 1999. "The capital gain lock-in effect and equilibrium returns," Journal of Public Economics, Elsevier, vol. 71(3), pages 355-378, March.
- 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, vol. 16(2), pages 275-287, April.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Landsman, Wayne R. & Shackelford, Douglas A., 1995. "The Lock-In Effect of Capital Gains Taxes: Evidence from the RJR Nabisco Leveraged Buyout," National Tax Journal, National Tax Association, vol. 48(2), pages 245-259, June.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:7827. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.