Intertemporal Tax Discontinuities

35 Pages Posted: 30 Mar 2000 Last revised: 22 Sep 2012

See all articles by Douglas A. Shackelford

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: December 1999

Abstract

This paper defines an intertemporal tax discontinuity (ITD) as a circumstance in which different tax rates are applied to gains and losses realized at one point in time versus some other point in time, and studies the effects of ITDs on market behaviors at the time of disclosures of firm performance. The results show that ITDs either depress or amplify trading volume at the time of disclosure, depending upon whether the disclosure is 'good news' or 'bad news,' repectively, and lead to 'overreactions' in price changes independent of the 'news.' We propose empirical tests of one intertemporal tax discontinuity, the spread between short-term capital gains tax rates and long-term capital gains tax rates. We predict that stock responses to disclosures, such as quarterly earnings announcements, increase in the difference between short- term and long-term capital gains tax rates.

Suggested Citation

Shackelford, Douglas A. and Verrecchia, Robert E., Intertemporal Tax Discontinuities (December 1999). NBER Working Paper No. w7451. Available at SSRN: https://ssrn.com/abstract=214568

Douglas A. Shackelford (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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