Tax‐Induced Trading: The Effect of the 1986 Tax Reform Act on Stock Market Activity

Paul J. Bolster · Lawrence B. Lindsey · Andrew Mitrusi

34 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Corporate Finance and Governance Economic and Fiscal Studies

Abstract

ABSTRACT The end of favorable tax treatment for long‐term capital gains caused investors to reassess traditional tax‐induced trading strategies. This study compares trading behavior in December 1986 and January 1987 with previous years. Our results indicate that these tax code changes had a powerful effect on trading behavior. Relative trading volume was considerably higher in December 1986 for long‐term winners but not significantly lower for long‐term losers. Results also indicate altered trading patterns based on short‐term gains in December 1986 and for long‐term winners in January 1987.

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1983The anomalous stock market behavior of small firms in January 1983Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns 1986Volume for Winners and Losers: Taxation and Other Motives for Stock Trading 1984Optimal stock trading with personal taxes 1981How taxes affect economic behavior 1977CAPITAL GAINS TAXATION AND YEAR‐END STOCK MARKET BEHAVIOR 1983Some aspects of the taxation of capital gains 1986How Burdensome are Capital Gains Taxes?

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2002Taxation, Risk-Taking, and Household Portfolio Behavior**I am grateful to Alan Auerbach, Scott Weisbenner, and participants at the Burch Center Symposium for helpful comments, to Andrew Mitrusi for providing me with data from TAXSIM, and to the Hoover Institution and National Science Foundation for research support.

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