The Impact of Capital Gains Taxes on Stock Price Reactions to S&P 500 Inclusion

Blouin, Jennifer; Raedy, Jana Smith; Shackelford, Douglas A.

doi:10.2139/ssrn.247797

The Impact of Capital Gains Taxes on Stock Price Reactions to S&P 500 Inclusion

32 Pages Posted: 19 Jan 2001

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)

There are 2 versions of this paper

Date Written: September 2000

Abstract

Capital gains tax rates vary with the length of time that individuals hold property. This paper investigates whether these holding period incentives to defer (accelerate) the sale of appreciated (depreciated) property affect the prices of securities entering the Standard & Poor's 500 Stock Index. Examining additions from 1978-1999, we find that on the first trading day following announcement, abnormal stock returns are increasing in the difference between short-term and long-term capital gains tax treatment. We infer that stock price adjustments shift individual investors' tax burdens to acquiring index funds. Consistent with temporary price pressure, the price reaction largely unwinds subsequently.

JEL Classification: H24, G12, G14, H22

Suggested Citation: Suggested Citation

Blouin, Jennifer and Smith Raedy, Jana and Shackelford, Douglas A., The Impact of Capital Gains Taxes on Stock Price Reactions to S&P 500 Inclusion (September 2000). Available at SSRN: https://ssrn.com/abstract=247797 or http://dx.doi.org/10.2139/ssrn.247797