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

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  • J. B. CHAY
  • DOSOUNG CHOI
  • JEFFREY PONTIFF

Abstract

We examine a 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 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¢ in unrealized gains for each dollar of realized capital gains, that is, $1 of realized capital gains is equivalent to 93¢ of unrealized gains. An investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%.

Suggested Citation

  • J. B. Chay & Dosoung Choi & Jeffrey Pontiff, 2006. "Market Valuation of Tax‐Timing Options: Evidence from Capital Gains Distributions," Journal of Finance, American Finance Association, vol. 61(2), pages 837-865, April.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:2:p:837-865
    DOI: 10.1111/j.1540-6261.2006.00856.x
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