Tax Induced Trading Around the Taxpayer Relief Act of 1997

39 Pages Posted: 24 Oct 2006

See all articles by Benjamin C. Ayers

Benjamin C. Ayers

University of Georgia

Oliver Zhen Li

National University of Singapore (NUS)

John R. Robinson

Texas A&M University; Texas A&M University - Department of Accounting

Date Written: October 2006

Abstract

We examine investor trading around the passage of the Taxpayer Relief Act of 1997 (TRA97) that reduced the capital gains tax rate from 28% to 20%. We provide evidence that individual investors increase their demand for equity shares on the announcement day of TRA97, consistent with the capitalization of capital gains taxes. On the effective day of TRA97, we find that individual investors increase the supply of equity shares with accrued gains, consistent with the lock-in effect of capital gains taxes. Regression results suggest that tax capitalization is associated with a more powerful effect on abnormal trading than the lock-in effect for the median stock trading around TRA97. Overall, our results suggest that capital gains taxes influence both the demand and supply for equity by tax sensitive investors and that the effect on demand is more pronounced than the effect on supply.

Keywords: Taxation, Dividend tax capitalization, Lock-in effect, Trading volume

JEL Classification: G10, H24

Suggested Citation

Ayers, Benjamin C. and Li, Oliver Zhen and Robinson, John R., Tax Induced Trading Around the Taxpayer Relief Act of 1997 (October 2006). Available at SSRN: https://ssrn.com/abstract=939496 or http://dx.doi.org/10.2139/ssrn.939496

Benjamin C. Ayers

University of Georgia ( email )

Athens, GA 30602
United States
706-542-3772 (Phone)
706-542-3630 (Fax)

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

John R. Robinson

Texas A&M University ( email )

mail stop 4353
Mays School of Business
college state, TX 77843-4353
United States
979-845-3457 (Phone)
979-845-0028 (Fax)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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