Do Tax Sensitive Investors Liquidate Appreciated Shares after a Capital Gains Tax Rate Reduction?

Posted: 22 Sep 2013

See all articles by James Chyz

James Chyz

University of Tennessee, Knoxville - Department of Accounting and Business Law

Oliver Zhen Li

National University of Singapore (NUS)

Date Written: April 23, 2012

Abstract

Using data on institutional investors’ portfolio composition before and after the capital gains tax rate cut in the Taxpayer Relief Act of 1997, we find evidence that, relative to less tax sensitive institutional investors, tax sensitive institutional investors are more willing to sell appreciated equity in response to the rate cut. Further, the reduction in value invested in appreciated equity appears to be lasting, consistent with the tax rate cut lowering tax sensitive investors’ impediments to optimally balancing their portfolios. These results provide direct evidence of a capital gains tax lock-in effect.

Keywords: TRA97, capital gains tax, lock-in, institutional investors

JEL Classification: G11, G12, H24

Suggested Citation

Chyz, James and Li, Oliver Zhen, Do Tax Sensitive Investors Liquidate Appreciated Shares after a Capital Gains Tax Rate Reduction? (April 23, 2012). National Tax Journal, Vol. 65, No. 3, 2012. Available at SSRN: https://ssrn.com/abstract=2329171

James Chyz (Contact Author)

University of Tennessee, Knoxville - Department of Accounting and Business Law ( email )

Knoxville, TN
United States
865-974-1701 (Phone)

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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