Volume for Winners and Losers: Taxation and Other Motives for Stock Trading




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    • Lakonishok is from the Faculty of Management, Tel Aviv University and the Johnson Graduate School of Management, Cornell University. Smidt is from the Johnson Graduate School of Management, Cornell University. The authors are grateful to Avraham Beja, George Constantinides, Paul Halpern, and Jim Poterba for their helpful comments and to Ofer Komai for his programming assistance. The paper was presented at Cornell University, Tel Aviv University, at the Symposium for Stock Market Anomalies (Brussels, 1985), and at the Western Finance Association (Colorado Springs, 1986).


Capital gains taxes create incentives to trade. Our major finding is that turnover is higher for winners (stocks, the prices of which have increased) than for losers, which is not consistent with the tax prediction. However, the turnover in December and January is evidence of tax-motivated trading; there is a relatively high turnover for losers in December and for winners in January. We conclude that taxes influence turnover, but other motives for trading are more important. We were unable to find evidence that changing the length of the holding period required to qualify for long-term capital gains treatment affected turnover.