Capital Gains Taxation and Stock Market Activity: Evidence from IPOs


  • William A. Reese Jr

    1. Tulane University
    Search for more papers by this author
    • Tulane University. I thank Dan Dhaliwal, Cindy Durtschi, Ed Dyl, Price Fishback, Ed Kane, Chris Lamoureux, Jim Nelson, Chuck Schnitzlein, René Stulz, Doug Witte, Mike Weis-bach, an anonymous referee, and participants at the University of Arizona and Tulane University seminars for helpful comments. I also thank Jay Ritter, Robert Miller, and Walid Busaba for the use of their IPO data. This research was begun as part of my dissertation submitted in partial fulfillment of the requirements for a Ph.D. at the University of Arizona.


Prior to the Tax Reform Act of 1986 (TRA '86), long-term capital gains were taxed at a lower rate than short-term gains, presenting investors with an opportunity to increase their after-tax return by delaying the sale of appreciated assets until after they qualified for long-term status and selling depreciated assets prior to long-term qualification. Using a sample of Initial Public Offerings, I find that stocks that appreciated prior to long-term qualification exhibit increased volume and decreased returns just after their qualification date, while stocks that depreciated prior to long-term qualification exhibit these effects just prior to their qualification date.