Tax Management Strategies with Multiple Risky Assets

59 Pages Posted: 22 Mar 2002

See all articles by Michael F. Gallmeyer

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business

Date Written: July 2004

Abstract

We study the consumption-portfolio problem of a capital gain taxed investor who has access to multiple risky stocks. Primary to our analysis is to understand how costly short selling influences portfolio choice with a shorting the box restriction. Our analysis uncovers two different strategies where it is optimal to short sell. The first, identified as a trading flexibility strategy which is new in our analysis, is an ex ante way of minimizing future tax-induced trading costs. With this strategy, the investor shorts one of the stocks even when no stock has an embedded gain. The second shorting strategy is an imperfect form of shorting the box used to ex post reduce aggregate equity exposure. Given these two short selling strategies, it is common for an unconstrained investor to short some equity while a constrained investor holds a positive investment in all stocks. A similar trading flexibility strategy is implicitly present if the investor can not short but is allowed to buy put options. Somewhat surprisingly, the benefit of trading separately in the two stocks for a short sale constrained investor is not economically significant; while, on the other hand, the welfare benefit is significant for an investor who can short at a low cost or who can trade in derivatives.

Keywords: Portfolio Choice, Capital Gain Taxation, Short Sales

JEL Classification: G11, H20

Suggested Citation

Gallmeyer, Michael F. and Kaniel, Ron and Tompaidis, Stathis, Tax Management Strategies with Multiple Risky Assets (July 2004). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=302705 or http://dx.doi.org/10.2139/ssrn.302705

Michael F. Gallmeyer (Contact Author)

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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