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CAPITAL GAINS TAXATION AND YEAR‐END STOCK MARKET BEHAVIOR

CAPITAL GAINS TAXATION AND YEAR‐END STOCK MARKET BEHAVIOR RO. 1 MARCH 1977 CAPITAL GAINS TAXATION AND YEAR-END STOCK MARKET BEHAVIOR EDWARD DYL* A. I. INTRODUCTION THE ECONOMIC EFFECTS OF capital gains taxation have been the subject of considerable discussion. Most authors have concluded that the current system of capital gains taxation has an undesirable effect on stock price movements because it offers an incentive for investors to realize capital losses and to defer capital gains.’ This view is summarized by Haugen and Wichern [7, p. 9871, who note: Economists have long been aware of the destabilizing property of the capital gains tax, commonly referred to as the “locked-in” effect.. .The tax acts to increase the supply of securities in a falling market and reduce the supply of securities in a rising market, increasing the magnitude of the fluctuation in both directions. This traditional view of the effects of capital gains taxation on stock prices denies that securities are perfect substitutes and, rather, asserts that taxation-motivated transactions cause a movement along a downward sloping demand schedule.’ Thus, this view directly contradicts the widely accepted proposition that the capital markets are efficient. In addition, the traditional view of the effect of capital gains taxation on the stock market http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

CAPITAL GAINS TAXATION AND YEAR‐END STOCK MARKET BEHAVIOR

The Journal of Finance , Volume 32 (1) – Mar 1, 1977

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References (21)

Publisher
Wiley
Copyright
1977 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1977.tb03250.x
Publisher site
See Article on Publisher Site

Abstract

RO. 1 MARCH 1977 CAPITAL GAINS TAXATION AND YEAR-END STOCK MARKET BEHAVIOR EDWARD DYL* A. I. INTRODUCTION THE ECONOMIC EFFECTS OF capital gains taxation have been the subject of considerable discussion. Most authors have concluded that the current system of capital gains taxation has an undesirable effect on stock price movements because it offers an incentive for investors to realize capital losses and to defer capital gains.’ This view is summarized by Haugen and Wichern [7, p. 9871, who note: Economists have long been aware of the destabilizing property of the capital gains tax, commonly referred to as the “locked-in” effect.. .The tax acts to increase the supply of securities in a falling market and reduce the supply of securities in a rising market, increasing the magnitude of the fluctuation in both directions. This traditional view of the effects of capital gains taxation on stock prices denies that securities are perfect substitutes and, rather, asserts that taxation-motivated transactions cause a movement along a downward sloping demand schedule.’ Thus, this view directly contradicts the widely accepted proposition that the capital markets are efficient. In addition, the traditional view of the effect of capital gains taxation on the stock market

Journal

The Journal of FinanceWiley

Published: Mar 1, 1977

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