Tax management strategies with multiple risky assets |
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Authors: | Michael F Gallmeyer Ron Kaniel Stathis Tompaidis |
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Institution: | 1. Mays Business School, Texas A&M University, College Station, TX 77843, USA;2. Fuqua School of Business, Duke University, Durham, NC 27708, USA;3. McCombs School of Business, University of Texas at Austin, Austin, TX 78712, USA |
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Abstract: | We study the consumption-portfolio problem in a setting with capital gain taxes and multiple risky stocks to understand how short selling influences portfolio choice with a shorting-the-box restriction. Our analysis uncovers a novel trading flexibility strategy whereby, to minimize future tax-induced trading costs, the investor optimally shorts one of the stocks (or equivalently, buys put options) even when no stock has an embedded gain. Alternatively, an imperfect form of shorting the box can reduce aggregate equity exposure ex post. Given these two short selling strategies, it is common for an unconstrained investor to short some equity while a constrained investor holds a positive investment in all stocks. With no shorting, the benefit of trading separately in multiple stocks is not economically significant. |
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Keywords: | G11 H20 |
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