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

Abstract

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: https://ssrn.com/abstract=2466958 or http://dx.doi.org/10.2139/ssrn.2466958

Sebastian Eichfelder (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

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

Mona Lau

Free University of Berlin (FUB)

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
112
Abstract Views
731
rank
267,222
PlumX Metrics