Market Valuation of Tax-Timing Options: Evidence from Capital Gains Distributions

Boston College Working Paper

57 Pages Posted: 11 Sep 2003

See all articles by J.B. Chay

J.B. Chay

Sungkyunkwan University - School of Business Administration

Dosoung Choi

Seoul National University - College of Business Administration

Jeffrey Pontiff

Boston College - Department of Finance

Date Written: June 26, 2003

Abstract

We examine a type of distribution that is taxed as a capital gain rather than as a dividend. Since the distribution induces a realized capital gain while the price change on the ex-distribution day is an unrealized gain, ex-day return behavior provides evidence of the value of tax-timing capital gains. We show that investors are compensated 7 cents in unrealized gains for each dollar of realized capital gains, i.e., $1 of realized capital gains is equivalent to 93 cents of unrealized gains. This implies that an investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%.

Keywords: Capital Gains Taxation, Dividends, Tax-Timing

JEL Classification: G12, G35, H24, H25

Suggested Citation

Chay, J.B. and Choi, Dosoung and Pontiff, Jeffrey, Market Valuation of Tax-Timing Options: Evidence from Capital Gains Distributions (June 26, 2003). Boston College Working Paper. Available at SSRN: https://ssrn.com/abstract=427460 or http://dx.doi.org/10.2139/ssrn.427460

J.B. Chay

Sungkyunkwan University - School of Business Administration ( email )

Myungryun-Dong
Seoul, 110-745
Korea
(82-2) 760-0484 (Phone)
(82-2) 745-4566 (Fax)

Dosoung Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Jeffrey Pontiff (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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