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Capital Gains Taxes and Stock Reactions to Quarterly Earnings Announcements

Author

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  • Jennifer L. Blouin
  • Jana Smith Raedy
  • Douglas A. Shackelford

Abstract

This paper examines the impact of capital gains taxes on equity pricing. Examining three-day cumulative abnormal returns for quarterly earning announcements from 1983-1997, we present evidence consistent with shareholders' capital gains taxes affecting stock price responses. To our knowledge, this is the first study to link shareholder taxes and share price responses to earnings releases. The results imply that shares trade at higher (lower) prices when individual investors face incremental taxes (tax savings) created by selling appreciated (depreciated) shares before they qualify for long-term treatment. Unlike prior studies that have focused on price reactions in settings where shareholder taxes are unusually salient (e.g., tax law changes, turn-of-the-year trading, or tax-sensitive transactions), this study finds the imprint of capital gains taxes in a more general setting.

Suggested Citation

  • Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2000. "Capital Gains Taxes and Stock Reactions to Quarterly Earnings Announcements," NBER Working Papers 7644, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7644
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    References listed on IDEAS

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    1. Bernard, Vl, 1987. "Cross-Sectional Dependence And Problems In Inference In Market-Based Accounting Research," Journal of Accounting Research, Wiley Blackwell, vol. 25(1), pages 1-48.
    2. Amoako-Adu, Ben & Rashid, M. & Stebbins, M., 1992. "Capital gains tax and equity values: Empirical test of stock price reaction to the introduction and reduction of capital gains tax exemption," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 275-287, April.
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    Cited by:

    1. Tomislav Globan & Tihana Skrinjaric, 2020. "Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange," Public Sector Economics, Institute of Public Finance, vol. 44(3), pages 299-329.
    2. Dhaliwal, Dan & Zhen Li, Oliver & Trezevant, Robert, 2003. "Is a dividend tax penalty incorporated into the return on a firm's common stock?," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 155-178, June.
    3. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2000. "Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act," NBER Working Papers 7827, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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