Capital Gains Tax Overhang and Price Pressure

I study whether the capital gains tax is an impediment to selling by some investors and if so, to what degree associated delayed selling affects stock prices. I find that selling decisions by institutions serving tax‐sensitive clients are sensitive to cumulative capital gains, a pattern not observed for institutions with predominantly tax‐exempt clients. Moreover, tax‐related underselling impacts stock prices during large earnings surprises for stocks held primarily by tax‐sensitive investors. The corresponding price reactions are less negative (more positive) with higher cumulative capital gains. This price pressure pattern is more severe when arbitrage is more costly.     

Capital Gains Taxes and Equity Trading: Empirical Evidence

Individual investors have an incentive to defer selling appreciated stock until it qualifies for tax‐favored, long‐term capital gains treatment. Shackelford and Verrecchia [2002] show that these incentives can affect equity trading around public disclosures. This article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the S&P 500 index. We find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property. The price increases, however, are temporary, reversing in subsequent trading days. The results are consistent with buyers believing the compensation to sell before long‐term qualification (through higher prices) is less costly than holding an inappropriately weighted portfolio. This finding—that personal capital gains taxes affect equity trading—adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes.     

Simple Technical Trading Rules and the Stochastic Properties of Stock Returns

This paper tests two of the simplest and most popular trading rules—moving average and trading range break—by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical analysis is extended through the use of bootstrap techniques. Overall, our results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular null models: the random walk, the AR(1), the GARCH-M, and the Exponential GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns following buy signals are less volatile than returns following sell signals, and further, the returns following buy signals are less volatile than returns following sell signals. Moreover, returns following sell signals are negative, which is not easily explained by any of the currently existing equilibrium models.     

Learning by Trading and the Returns to Human Capital in Developing Countries

Recent evidence shows that the returns to labor and the skillpremium both increase in developing countries after trade liberalization,despite the low skill content of their exports. The author explainsthis apparent puzzle by arguing that trade increases technologytransfers from industrial to developing countries and that thetransfer technology is biased in favor of skilled labor. Therelative demand for skilled labor increases during the transitionfollowing liberalization, and so the gains enjoyed by skilledlabor are temporary, even in the absence of supply responses.The gains become longer lasting when the transferred technologyis also skill-biased.     

Correlated Trading and Returns

A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.     

Depreciation-Related Capital Gains,Differential Tax Rates,and the Market Value of Real Estate Investment Trusts

We develop a model for valuing U.S. real estate investment trusts (REITs) that considers the tax liability impounded in REITs’ property portfolios. This liability is a function of the portfolio’s accumulated depreciation and is driven by different tax rates applied to individual components of the total gain from property sales. These two components are the capital gain resulting from the sale of property at a price higher than its cost and the gain due to the recapture of depreciation taken during the use of the property. Our measure of value is the REIT’s net asset liquidation value (NALV). The metric of REIT value currently used by analysts is a REIT’s net asset value (NAV), but a REIT’s NAV will always be greater than the NALV and therefore overestimate market value, all else equal. Finally, using observed market prices for REITs, we provide evidence that NALVs give superior estimates of REIT market prices than do NAVs.     

美国资本利得税制的历史演变、原因及借鉴意义

美国课征资本利得税最初以公平社会分配和取得财政收入为目标.但是近90年的实践表明,过高的资本利得税对经济发展尤其是资本的形成具有明显的抑制作用.整个资本利得税制由复杂到简便、税率由高就低的演变过程,实质上也是效率优先、兼顾公平的理论实践过程.较低的资本利得税极大地刺激了美国当代经济的发展.这一结论对完善我国证券税收制度具有重要的借鉴意义.     

Individual Investor Trading and Stock Returns

This paper investigates the dynamic relation between net individual investor trading and short‐horizon returns for a large cross‐section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk‐averse individuals provide liquidity to meet institutional demand for immediacy.     

Capital Gains, Dividend Yields, and Expected Inflation

One explanation for the negative relationship between short-horizon stock returns and inflation is that inflation proxies (inversely) for expected future real output. In this paper, I examine the possibility that inflation also proxies for variation in real price/dividend ratios (excess returns). I show that when the covariance between real price/dividend ratios and inflation is nonzero, the relationship between returns and expected inflation differs for the two components of returns: dividend yields and capital gains returns. My empirical evidence demonstrates that dividend yields and capital gains are related differently to expected inflation in U.S. and foreign markets.     

Insider Trading Activity,Different Market Regimens,and Abnormal Returns

This paper show that corporate insiders earn abnormal returns by adjusting their own firm's stock trading to future market movements. Insider trading activity in bear markets is characterized by decreases in insider sales and increases in purchases, consistent with the view that those markets are followed by improved economic conditions. Conversely, insider sales increase and purchases decrease in bull markets, consistent with the view that inferior market conditions tend to follow those periods.     

Trading and Returns under Periodic Market Closures

This paper studies how market closures affect investors' trading policies and the resulting return-generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U-shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open-to-open returns than close-to-close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs.     

Capital Investment,Innovative Capacity,and Stock Returns

We study the dynamic implications of capital investment in innovative capacity (IC) on future stock returns, investment, and profitability by modeling the unique effects of IC investment on uncertain option generation/exercise and postexercise revenue. The model highlights the diverse effects of IC investment on expected returns in different postinvestment regimes and yields the novel prediction that, under the neoclassical assumption of nonincreasing revenue returns, IC investment is positively related to subsequent cumulative stock returns with a lag. The model also predicts a positive effect of IC investment on future investment and profitability. We find strong empirical support for these predictions.     

Trading Volume and Cross-Autocorrelations in Stock Returns

This paper finds that trading volume is a significant determinant of the lead-lag patterns observed in stock returns. Daily and weekly returns on high volume portfolios lead returns on low volume portfolios, controlling for firm size. Nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings. These patterns arise because returns on low volume portfolios respond more slowly to information in market returns. The speed of adjustment of individual stocks confirms these findings. Overall, the results indicate that differential speed of adjustment to information is a significant source of the cross-autocorrelation patterns in short-horizon stock returns.     

The Dynamic Relation Between Stock Returns, Trading Volume, and Volatility

We examine the dynamic relation between returns, volume, and volatility of stock indexes. The data come from nine national markets and cover the period from 1973 to 2000. The results show a positive correlation between trading volume and the absolute value of the stock price change. Granger causality tests demonstrate that for some countries, returns cause volume and volume causes returns. Our results indicate that trading volume contributes some information to the returns process. The results also show persistence in volatility even after we incorporate contemporaneous and lagged volume effects. The results are robust across the nine national markets.     

Corporate Takeovers: Mode of Payment, Returns and Trading Activity

This paper examines the impact of takeover bids and, in particular, the method of payment to the shareholders of the target firms on the returns, trading activity and bid-ask spreads of target and bidding firms traded on the London Stock Exchange. It suggests that the shareholders of target firms benefit substantially from takeover activity while the shareholders of bidding firms do not suffer. The combined value of the firms engaged in takeover activity increases by a small percentage during the event period. However, the benefit from a takeover announcement to the shareholders of the target firm varies from year to year and has declined in the recent past. The magnitude of excess returns available to the shareholders is also dependent on the mode of payment. Prices of target (bidding) firms increase (decrease) most if the shareholders of the target firms are given an option to receive payment in shares or in cash. The findings also reveal that during the event period trading activity in target and bidding companies increases depending on the form in which payments to shareholders are made. In response to this increased liquidity, the bid-ask spreads of target and bidding firms decline during the event period.     

Inalienable Customer Capital,Corporate Liquidity,and Stock Returns

We develop a model in which customer capital depends on key talents' contribution and pure brand recognition. Customer capital guarantees stable demand but is fragile to financial constraints risk if retained mainly by talents, who tend to quit financially constrained firms, damaging customer capital. Using a proprietary, granular brand‐perception survey, we construct a firm‐level measure of the inalienability of customer capital (ICC) that captures the degree to which customer capital depends on talents. Firms with higher ICC have higher average returns, higher talent turnover, and more precautionary financial policies. The ICC‐sorted long‐short portfolio's spread comoves with financial constraints factor.     

Skewness of Returns, Capital Adequacy, and Mortgage Lending

We calibrate a simulation model of credit value-at-risk for mortgage lending to UK experience. Simulations to capture the skewness of returns that might arise in the context of a financial crisis suggest that the IRB calculations of the new Basel Accord can substantially understate prudential capital adequacy. The same model shows that raising capital requirements has only a small impact on bank funding costs. We conclude that Pillar 2 supervisory review should increase capital requirements above IRB levels for secured bank assets—those whose returns can potentially fall furthest, relative to other, normally “riskier” assets, in extreme outcomes. JEL classification: G21, G28, R31. Presented at the December 2003 conference at the University of Tor Vegata, Rome. We are grateful for comments from William Lang, Mario Onarato, Larry Wall, and from an anonymous referee. All errors and omissions are our own responsibility. “The lady doth protest too much, methinks. The Queen's response to the players in Hamlet, Act 3, scene 2.     

Retail Trading and IPO Returns in the Aftermarket

Using trade size from the Trade and Quote (TAQ) data set as a proxy for individual versus institutional trading, this paper finds that the effects of trading of these two types of investors on initial public offering (IPO) returns on the first trading day depend on the hotness of the IPO. My regression results reveal that IPOs’ open-to-close returns are positively related to small trade participation, small trade purchases, and small trade order imbalance in the hot IPO sample, but not in the cold and neutral IPO samples. In addition, the aftermarket prices of cold and neutral IPOs are primarily driven by the trading of institutional investors, who are less likely to be driven by sentiment.