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Capital Gains Tax Overhang and Price Pressure
Author(s) -
JIN LI
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.1540-6261.2006.00876.x
Subject(s) - monetary economics , capital gains tax , arbitrage , economics , earnings , deferred tax , tax reform , ad valorem tax , capital (architecture) , value added tax , business , financial economics , state income tax , finance , market economy , macroeconomics , gross income , archaeology , history
ABSTRACT I study whether the capital gains tax is an impediment to selling by some investors and if so, to what degree associated delayed selling affects stock prices. I find that selling decisions by institutions serving tax‐sensitive clients are sensitive to cumulative capital gains, a pattern not observed for institutions with predominantly tax‐exempt clients. Moreover, tax‐related underselling impacts stock prices during large earnings surprises for stocks held primarily by tax‐sensitive investors. The corresponding price reactions are less negative (more positive) with higher cumulative capital gains. This price pressure pattern is more severe when arbitrage is more costly.