Capital Gains Taxes and the Market Response to Earnings Announcements

50 Pages Posted: 15 Jul 2017 Last revised: 4 Aug 2018

See all articles by Greg Clinch

Greg Clinch

Independent

Bradley P. Lindsey

Utah State University - Huntsman School of Business

William J. Moser

Miami University

Mahmoud Odat

University of Technology, Sydney

Date Written: August 1, 2018

Abstract

We investigate the stock price and trading volume effects of differential capital gains taxes applied to short and long-term capital gains when firms disclose public information. We extend the theoretical framework developed in Shackelford and Verrechia (2002) linking differential CGT to price and volume, allowing for positive and negative news and incorporating exogenous non-taxable, uninformed traders. Our model, like SV, indicates that price responses to public information are magnified and volume inhibited during tax capital gain tax regimes in which the difference between short-term capital gains tax rates and long-term capital gains tax rates are larger. However, the degree of magnification/inhibition for price reaction and trading volume differs across multiple well-defined regions of public signal and supply change realizations. We use actual stock price and trading data to empirically investigate these predictions. Our results provide strong support for the price response predictions, but at best marginal support for the volume predictions.

Keywords: Shareholder Taxes, Stock Price, Earnings Suprise, Earnings Response Coefficient

JEL Classification: C02, G12, G14, H24

Suggested Citation

Clinch, Greg and Lindsey, Bradley P. and Moser, William J. and Odat, Mahmoud, Capital Gains Taxes and the Market Response to Earnings Announcements (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3002735 or http://dx.doi.org/10.2139/ssrn.3002735

Greg Clinch

Independent

No Address Available

Bradley P. Lindsey

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
(435) 797-4126 (Phone)

William J. Moser (Contact Author)

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

Mahmoud Odat

University of Technology, Sydney ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

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