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Capital Gains Holding Periods and Equity Trading: Evidence from the 1998 Tax Act

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

Abstract

This paper exploits an unusually powerful setting to explore a choice many individual investors face regularly the decision to sell today or postpone selling until lower rates are available in the future. We examine trading volume and stock returns around the 1998 reduction in the holding period required for individual investors to receive the most favorable long-term capital gains tax rate. For firms whose initial public shareholders were affected by the legislation, we find trading volume increasing and share returns decreasing in past price performance on the day the legislation was publicly disclosed. The results are consistent with capital gains holding periods distorting markets sufficiently that if investors are permitted to liquidate appreciated positions at favorable rates, enough will sell immediately to move prices. To our knowledge, this is the first study linking trading volume and security prices to a change in capital gains holding periods.

Suggested Citation

  • 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.
    • Handle: RePEc:nbr:nberwo:7827
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    References listed on IDEAS

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    Cited by:

    1. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171, Elsevier.

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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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