Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act

39 Pages Posted: 12 Aug 2000 Last revised: 20 Sep 2012

See all articles by Jennifer Blouin

Jennifer Blouin

University of Pennsylvania - Accounting Department

Jana Smith Raedy

University of North Carolina at Chapel Hill

Douglas A. Shackelford

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

This paper exploits an unusually powerful setting to explore a choice many individual investors face regularly the decision to sell today or postpone selling until lower rates are available in the future. We examine trading volume and stock returns around the 1998 reduction in the holding period required for individual investors to receive the most favorable long-term capital gains tax rate. For firms whose initial public shareholders were affected by the legislation, we find trading volume increasing and share returns decreasing in past price performance on the day the legislation was publicly disclosed. The results are consistent with capital gains holding periods distorting markets sufficiently that if investors are permitted to liquidate appreciated positions at favorable rates, enough will sell immediately to move prices. To our knowledge, this is the first study linking trading volume and security prices to a change in capital gains holding periods.

Suggested Citation

Blouin, Jennifer and Smith Raedy, Jana and Shackelford, Douglas A., Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act (August 2000). NBER Working Paper No. w7827, Available at SSRN: https://ssrn.com/abstract=238475

Jennifer Blouin (Contact Author)

University of Pennsylvania - Accounting Department ( email )

1315 SHDH
3620 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Jana Smith Raedy

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

Douglas A. Shackelford

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
36
Abstract Views
1,299
PlumX Metrics