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Tax‐Induced Trading: The Effect of the 1986 Tax Reform Act on Stock Market Activity
Author(s) -
BOLSTER PAUL J.,
LINDSEY LAWRENCE B.,
MITRUSI ANDREW
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb05060.x
Subject(s) - tax reform act , monetary economics , capital gains tax , economics , alternative trading system , business , term (time) , algorithmic trading , tax reform , financial economics , ad valorem tax , state income tax , public economics , gross income , physics , quantum mechanics
The end of favorable tax treatment for long‐term capital gains caused investors to reassess traditional tax‐induced trading strategies. This study compares trading behavior in December 1986 and January 1987 with previous years. Our results indicate that these tax code changes had a powerful effect on trading behavior. Relative trading volume was considerably higher in December 1986 for long‐term winners but not significantly lower for long‐term losers. Results also indicate altered trading patterns based on short‐term gains in December 1986 and for long‐term winners in January 1987.