Equity Price Pressure from the 1998 Reduction in the Capital Gains Holding Period
Jennifer L. Blouin
University of Pennsylvania - Accounting Department
Jana Smith Raedy
University of North Carolina at Chapel Hill
Douglas A. Shackelford
University of North Carolina at Chapel Hill; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Accounting Area
This paper provides evidence consistent with shareholders' personal tax incentives affecting stock prices and trading volume. On June 24, 1998, the marginal tax rate on capital gains was reduced from 28 percent to 20 percent for individual investors holding shares between 12 and 18 months. This study compares firms whose initial public shareholders immediately benefited from the reduction to other IPO firms. The sample of immediately affected firms recorded mean, incremental, one-day stock price declines of -1.3 percent amid heavy trading. The results are consistent with capital gains tax planning constraining investment portfolio management. When the constraint was lifted, enough shareholders sold that prices moved. The results imply that despite increasingly liquid capital markets, transaction costs remain large enough to prevent investors from entering the market immediately and fully offsetting downward price pressure from individual capital gains tax management.
Number of Pages in PDF File: 47
Keywords: Capital gains taxes, initial public offerings, trading volume, price pressure
JEL Classification: H24, G12, G14, G18, H22working papers series
Date posted: March 9, 2003
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