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Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange

Author

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  • Tomislav Globan

    (Faculty of Economics & Business, University of Zagreb, Zagreb, Croatia)

  • Tihana Skrinjaric

    (Faculty of Economics & Business, University of Zagreb, Zagreb, Croatia)

Abstract
This paper analyses the effects of a recently introduced capital gains tax on the trading volume on the Zagreb Stock Exchange. Using three different methodological approaches - event study methodology, regression discontinuity design and panel regressions - we offer evidence that the introduction of the capital gains tax in January 2016 created abnormally high trading volume patterns shortly before the tax came into force and abnormally low volume patterns after the fact, further decreasing the liquidity of an already poorly liquid market. The negative effects are significant in both the short and the longer term, as our difference-in-differences estimations suggest that the average trading volume in the three post-tax years decreased by 23% vis-Ä‚ -vis the pre-tax period. Given that the revenues collected from this tax are almost negligible, but create considerable negative externalities, our main policy recommendation for countries with underdeveloped and not very liquid stock markets is to use less restrictive tax policies to encourage investment and attract as many new investors as possible.

Suggested Citation

  • Tomislav Globan & Tihana Skrinjaric, 2020. "Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange," Public Sector Economics, Institute of Public Finance, vol. 44(3), pages 299-329.
    • Handle: RePEc:ipf:psejou:v:44:y:2020:i:3:p:299-329
    DOI: 10.3326/pse.44.3.2
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    References listed on IDEAS

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    Cited by:

    1. Raymond L. Richman & Jesse T. Richman & Howard B. Richman, 2021. "Accrued Gains are not Income: An Administratively Simple Rollover Treatment for Capital Gains Taxation," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(12), pages 1-1, December.

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    More about this item

    Keywords

    capital gains tax; event study; regression discontinuity; stock market; trading volume;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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