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Capital gains taxes and asset prices: The impact of tax awareness and procrastination

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  • Eichfelder, Sebastian
  • Lau, Mona

Abstract

We argue that the impact of capital gains taxation on asset pricing depends on the tax awareness of market participants. While institutional investors should be generally wellinformed about tax regulations, private investors have only limited tax knowledge and resources. As a result, market reactions on tax law changes may be delayed if a considerable fraction of market participants is not fully tax-aware. In line with our argument, we find evidence that the introduction of a previously announced German flat tax on private capital gains in 2009 resulted in a temporarily strong and significant increase of trading volumes, daily returns and asset prices. Our research implies that tax law changes provide an opportunity for well-informed investors to generate arbitrage benefits. Corresponding to our estimate, the capital gains tax resulted in an increase demand for shares of 160 % as well as in an price surplus of about 7.4 % within the last two trading days 2008.

Suggested Citation

  • Eichfelder, Sebastian & Lau, Mona, 2014. "Capital gains taxes and asset prices: The impact of tax awareness and procrastination," arqus Discussion Papers in Quantitative Tax Research 170, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:170
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    Cited by:

    1. Sebastian Eichfelder & Mona Lau, 2015. "Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns," FEMM Working Papers 150019, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    2. Eichfelder, Sebastian & Lau, Mona, 2015. "Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns," arqus Discussion Papers in Quantitative Tax Research 195, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Eichfelder, Sebastian & Lau, Mona, 2015. "Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns," Discussion Papers 2015/33, Free University Berlin, School of Business & Economics.

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    More about this item

    Keywords

    capital gains tax; asset pricing; tax awareness; tax arbitrage;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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