The Turn-of-the-Year Effect and Tax-Loss-Selling by Institutional Investors

Journal of Accounting and Economics, Vol. 57, No. 1, February 2014

Posted: 26 Jan 2014

See all articles by Stephanie A. Sikes

Stephanie A. Sikes

University of Pennsylvania - Accounting Department

Date Written: January 24, 2014

Abstract

Prior studies attribute the turn-of-the-year effect whereby small capitalization stocks earn unusually high returns in early January to tax-loss-selling by individual investors and window-dressing by institutional investors. My results suggest that a significant portion of the effect on turn-of-the-year returns that prior studies attribute to window-dressing is actually attributable to tax-loss-selling by institutional investors. Among small capitalization stocks, I find that institutional investors with strong tax incentives and weak window-dressing incentives realize significantly more losses in the fourth quarter than in the first three quarters of the calendar year, and that their fourth quarter realized losses have a significant impact on turn-of-the-year returns. A one percentage point change in these institutional investors’ fourth quarter realized losses scaled by a firm’s market capitalization results in an increase of 47 basis points in the firm’s average daily return over the first three trading days of January, which represents a 46 percent change for the mean firm.

Keywords: turn-of-the-year effect; tax-loss-selling; institutional investors

JEL Classification: G20; H24

Suggested Citation

Sikes, Stephanie A., The Turn-of-the-Year Effect and Tax-Loss-Selling by Institutional Investors (January 24, 2014). Journal of Accounting and Economics, Vol. 57, No. 1, February 2014, Available at SSRN: https://ssrn.com/abstract=2384862

Stephanie A. Sikes (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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