Equity Price Pressure from the 1998 Reduction in the Capital Gains Holding Period

47 Pages Posted: 9 Mar 2003

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)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2002

Abstract

This paper provides evidence consistent with shareholders' personal tax incentives affecting stock prices and trading volume. On June 24, 1998, the marginal tax rate on capital gains was reduced from 28 percent to 20 percent for individual investors holding shares between 12 and 18 months. This study compares firms whose initial public shareholders immediately benefited from the reduction to other IPO firms. The sample of immediately affected firms recorded mean, incremental, one-day stock price declines of -1.3 percent amid heavy trading. The results are consistent with capital gains tax planning constraining investment portfolio management. When the constraint was lifted, enough shareholders sold that prices moved. The results imply that despite increasingly liquid capital markets, transaction costs remain large enough to prevent investors from entering the market immediately and fully offsetting downward price pressure from individual capital gains tax management.

Keywords: Capital gains taxes, initial public offerings, trading volume, price pressure

JEL Classification: H24, G12, G14, G18, H22

Suggested Citation

Blouin, Jennifer and Smith Raedy, Jana and Shackelford, Douglas A., Equity Price Pressure from the 1998 Reduction in the Capital Gains Holding Period (April 2002). Available at SSRN: https://ssrn.com/abstract=369341 or http://dx.doi.org/10.2139/ssrn.369341

Jennifer Blouin

University of Pennsylvania - Accounting Department ( email )

1315 SHDH
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Jana Smith Raedy (Contact Author)

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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