Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns

Sebastian Eichfelder () and Mona Lau ()
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Sebastian Eichfelder: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg
Mona Lau: Faculty of Economics and Management, Freie Universität Berlin and Ernst & Young Berlin

No 150019, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: We argue that the tax capitalization effect is a function of the attention of market participants. Market reactions can therefore be driven not only by the announcement dates of tax events but also by factors influencing the dissemination of tax information, such as deadlines and media reports. Analyzing the introduction date of the earlier-announced German capital gains tax reform of 2009 by triple-difference estimation, we find evidence of a delayed market reaction long after the announcement date. Within the last two (five) trading days before the deadline, we observe a sharp increase in abnormal trading volumes of 151.7% (104.0%). The aggregate abnormal return of the German capital market in the last five trading days in 2008 was 10.6%. Furthermore, we find a significant and positive correlation between trading volumes and measures for awareness of the upcoming tax reform (Google searches and media reports).

Keywords: Capital gains tax; asset pricing; tax awareness; tax arbitrage; turn-of-the-year effect; market efficiency (search for similar items in EconPapers)
JEL-codes: G02 G12 H24 M41 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2015-12
New Economics Papers: this item is included in nep-acc and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:mag:wpaper:150019

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