Abstract: | We examine the returns of stocks in Cowles Industrial Index before and after the introduction of personal income taxes in 1917. This is distinct from earlier studies because we cross-sectionally analyze the relationship between the returns of the individual stocks and measures of tax-loss selling potential and size. We find that excess returns at the turn-of-the-year and for the month of January were not significant until after 1917. These results provide strong support for the tax-loss selling hypothesis as an explanation for the January seasonal in the returns of small firms. |