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Market Valuation of Tax‐Timing Options: Evidence from Capital Gains Distributions
Author(s) -
CHAY J. B.,
CHOI DOSOUNG,
PONTIFF JEFFREY
Publication year - 2006
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.1540-6261.2006.00856.x
Subject(s) - economics , capital gains tax , cost of capital , capital gain , monetary economics , marginal cost of capital schedule , capital (architecture) , valuation (finance) , dividend , physical capital , microeconomics , double taxation , financial capital , ad valorem tax , capital formation , finance , market economy , human capital , profit (economics) , archaeology , history
We examine a distribution that is taxed as a capital gain rather than as a dividend. Since the distribution induces a realized capital gain while the price change is an unrealized gain, ex‐day return behavior provides evidence of the value of tax‐timing capital gains. We show that investors are compensated 7¢ in unrealized gains for each dollar of realized capital gains, that is, $1 of realized capital gains is equivalent to 93¢ of unrealized gains. An investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%.