Capital Gains Taxes and Stock Return Volatility

55 Pages Posted: 20 Mar 2007 Last revised: 22 Sep 2012

See all articles by Zhonglan Dai

Zhonglan Dai

University of Texas at Dallas - School of Management

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Harold H. Zhang

University of Texas at Dallas - Naveen Jindal School of Management; China Academy of Financial Research (CAFR)

Date Written: August 11, 2010

Abstract

This paper presents an empirical investigation of the effect of changes in capital gains tax rate on stock return volatility. We focus on two observable cross-sectional variations in the extent to which changes in capital gains tax rate affect return volatility — unrealized capital gains and dividend distributions. For both cross-sectional variations, we predict that the more stock returns are expected to be subject to capital gains taxation, the greater the increase in return volatility following a capital gains tax rate reduction. Consistent with these predictions, after passage of the 1978 and 1997 capital gain tax rate reductions, we find larger increases in the return volatility for more appreciated stocks than for less appreciated stocks and larger increases in the return volatility for non-dividend-paying stocks than for dividend-paying stocks, after controlling for an extensive set of firm characteristics, macroeconomic conditions, domestic and foreign stock market performances.

Keywords: Capital Gains Taxes, Stock Return Volatility, Accrued Capital Gains

JEL Classification: G12, G35, G32, H24

Suggested Citation

Dai, Zhonglan and Shackelford, Douglas A. and Zhang, Harold Huibing, Capital Gains Taxes and Stock Return Volatility (August 11, 2010). Available at SSRN: https://ssrn.com/abstract=972349 or http://dx.doi.org/10.2139/ssrn.972349

Zhonglan Dai

University of Texas at Dallas - School of Management ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Douglas A. Shackelford (Contact Author)

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

Harold Huibing Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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