Capital Gain Tax Overhang and Price Pressure

Jin, Li (2006) Capital Gain Tax Overhang and Price Pressure. The Journal of Finance, 61 (3). pp. 1399-1430.

Abstract

I study whether the capital gains tax is an impediment to selling by some investors and if so, to what degree associated delayed selling affects stock prices. I find that selling decisions by institutions serving tax-sensitive clients are sensitive to cumulative capital gains, a pattern not observed for institutions with predominantly tax-exempt clients. Moreover, tax-related underselling impacts stock prices during large earnings surprises for stocks held primarily by tax-sensitive investors. The corresponding price reactions are less negative (more positive) with higher cumulative capital gains. This price pressure pattern is more severe when arbitrage is more costly.

Item Type: Article
Keywords: investments; capital gains tax
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 20 Mar 2013 11:35
Last Modified: 23 Oct 2015 14:08
URI: http://eureka.sbs.ox.ac.uk/id/eprint/4499

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