On the Role of Intangible Information and Capital Gains Taxes in Long-Term Return Reversals


  • Ajay Bhootra

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    • Ajay Bhootra is an Assistant Professor in the Mihaylo College of Business and Economics at California State University, Fullerton in Fullerton, CA.

  • I am very grateful to Marc Lipson and Raghu Rau (Editors) and an anonymous referee for many insightful suggestions that led to significant improvements. Special thanks to my dissertation chair, Mike Cliff, for his advice and detailed feedback on initial versions. I also thank Michael Gallmeyer, Huseyin Gulen, Greg Kadlec, Raman Kumar, and seminar participants at Virginia Tech and 2008 FMA Annual Meetings in Grapevine, TX for helpful comments and suggestions. I am responsible for any errors.


Prior studies have linked long-term reversals to the magnitude of locked-in capital gains suggesting that reversals are driven by tax effects and not overreaction. I find that locked-in capital gains do not explain the reversals in winners when winner returns are based on intangible information. In fact, the reversals for intangible return winners are long lasting and robust to controls for growth in assets and capital expenditures. To the extent that reversals associated with intangible information stem from investors’ overreaction to intangible information and given the prior results linking reversals only to intangible information, my results suggest that overreaction still explains reversal patterns in US stock returns.