Liquidity, Investor-Level Tax Rates, and Expected Rates of Return
Posted: 13 Feb 2012
Date Written: February 2012
Prior research predicts a positive relation between expected rates of return and investor-level tax rates. We provide new theory that predicts that lower liquidity amplifies and higher liquidity attenuates this positive relation. We empirically test our prediction using the cuts to individual investors’ maximum statutory tax rates on dividend income and capital gain income enacted by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA03).
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