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Capital gains tax, supply-driven trading and ownership structure: direct evidence of the lock-in effect


  • The authors appreciate the constructive comments of Stephen Brown, Ellie Chapple, Dan Dhaliwal, Stephen Easton, Bruce Grundy, Jason Hall, Michael Schill, Jim Seida, Terry Shevlin and David Smith, conference participants at the Accounting and Finance Association of Australia and New Zealand (AFAANZ)/International Association for Accounting Education and Research (IAAER) 2008 Annual Conference, the 21st Australasian Finance and Banking Conference and the American Taxation Association 2009 Mid-Year Meeting, and seminar participants at the University of Melbourne, the University of Newcastle, La Trobe University and the University of Adelaide. We also gratefully acknowledge the financial support provided by the CPA Australia Research Grant Scheme, access to intraday equity trading data provided by the Securities Industry Research Centre of Asia-Pacific (SIRCA) and CHESS registration information provided by the Australian Securities Exchange (ASX).


This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long-term capital gains increases the supply of shares that qualify for long-term status, thereby causing downward price pressure. We find evidence of abnormal seller-initiated trading following the 12-month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller-initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long-term tax status.