Capital Gains Taxation and Equity Returns: The Case of Mutual Savings Banks


  • Michael A. Kelly,

  • Xin Wu,

  • Donald R. Chambers

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    • The first author is from Lafayette College. The second author is from The Wharton School, University of Pennsylvania. The third author is from Lafayette College. They are grateful for comments from Qin Lu, David Stifel and workshop participants at Lafayette College. They are especially grateful for comments from an anonymous referee and Martin Walker (editor).

Michael A. Kelly, Simon Center 204, Lafayette College, Easton, PA 18042–1776, USA. e-mail:


Abstract:  IPOs of demutualized savings banks create tax sensitive shareholders with identical acquisition dates and tax bases. We investigate security volume and returns surrounding the one-year anniversary of the IPOs when unrealized capital gains and losses for original shareholders become long-term capital gains for taxation purposes. Trading volume levels confirmed our hypothesis that investors defer the recognition of capital gains, but we could not confirm that tax motivated trading affected security prices. The results have implications beyond taxation and US markets. For non-institutional investors, presumed to exhibit non-rationality, tax motivated trading exists and does not have a significant effect on prices.