Tax loss selling and the contrarian investment strategy

Tax loss selling is examined as a possible explanation for the long term price reversal patterns associated with the contrarian investment strategy. Our empirical results are consistent with a tax effect. When we adjust for size and potential tax loss selling, the abnormally high returns previously found in January are eliminated. These results suggest that short term tax effects are associated with the longer term overreaction or contrarian hypothesis, and at this point cannot be dismissed.