Capital Gains Taxes and Asset Prices: The Impact of Tax Awareness and Procrastination

33 Pages Posted: 17 Jul 2014

See all articles by Sebastian Eichfelder

Sebastian Eichfelder

Otto-von-Guericke-Universität Magdeburg

Mona Lau

Free University of Berlin (FUB)

Date Written: July 15, 2014


We argue that the impact of capital gains taxation on asset pricing depends on the tax awareness of market participants. While institutional investors should be generally well-informed about tax regulations, private investors have only limited tax knowledge and resources. As a result, market reactions on tax law changes may be delayed if a considerable fraction of market participants is not fully tax-aware. In line with our argument, we find evidence that the introduction of a previously announced German flat tax on private capital gains in 2009 resulted in a temporarily strong and significant increase of trading volumes, daily returns and asset prices. Our research implies that tax law changes provide an opportunity for well-informed investors to generate arbitrage benefits. Corresponding to our estimate, the capital gains tax resulted in an increase demand for shares of 160% as well as in an price surplus of about 7.4% within the last two trading days 2008.

Keywords: capital gains tax, asset pricing, tax awareness, tax arbitrage

JEL Classification: G1, H25, M41

Suggested Citation

Eichfelder, Sebastian and Lau, Mona, Capital Gains Taxes and Asset Prices: The Impact of Tax Awareness and Procrastination (July 15, 2014). Available at SSRN: or

Sebastian Eichfelder (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
0391-67-18811 (Phone)

Mona Lau

Free University of Berlin (FUB)

Van't-Hoff-Str. 8
Berlin, Berlin 14195

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