TY  - JOUR
AU  - Dai,Zhonglan
AU  - Maydew,Edward
AU  - Shackelford,Douglas A.
AU  - Zhang,Harold H.
TI  - Capital Gains Taxes and Asset Prices: Capitalization or Lock-In?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12342
PY  - 2006
Y2  - June 2006
UR  - http://www.nber.org/papers/w12342
L1  - http://www.nber.org/papers/w12342.pdf
N1  - Author contact info:
Zhonglan Dai
School of Management
The University of Texas at Dallas
Richardson, TX 75080-3021
E-Mail: zdai@utdallas.edu

Edward Maydew
Kenan-Flager Business School
University of North Carolina-Chapel Hill
Campus Box 3490, McColl Building
Chapel Hill, NC 27599-3490
E-Mail: edward_maydew@unc.edu

Douglas Shackelford
University of North Carolina at Chapel Hill
Kenan-Flagler Business School
Campus Box 3490, McColl Building
Chapel Hill, NC  27599-3490
Tel: 919/962-3197
Fax: 919/962-4727
E-Mail: doug_shack@unc.edu

Harold Zhang
University of Texas at Dallas
E-Mail: harold.zhang@utdallas.edu
M2  - featured in NBER digest on 2006-06-26
AB  - This paper examines the impact on asset prices from a reduction in the long-term capital gains tax rate using an equilibrium approach that considers both demand and supply responses. We demonstrate that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock-in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock-in effect in the week after the rate reduction became effective. Nondividend paying stocks (whose shareholders only face capital gains taxes) experience higher average returns during the week the capitalization effect dominates and stocks with large embedded capital gains and high tax sensitive investor ownership exhibit lower average returns during the week the lock-in effect dominates. We also find that the tax cut increases the trading volume during the week immediately before and after the tax cut becomes effective and in stocks with large embedded capital gains and high tax sensitive ownership during the dominant lock-in week.
ER  -