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Evidence on Tax-Motivated Securities Trading Behavior

Authors

  • S. G. BADRINATH,

  • WILBUR G. LEWELLEN

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    • Northeastern University and Purdue University, respectively. Portions of the research reported herein were supported by the National Bureau of Economic Research and by a grant from the National Science Foundation. Helpful discussions with Gordon Wright are gratefully acknowledged as well. The authors, however, bear responsibility for the analysis and conclusions.

ABSTRACT

Tax-loss selling by investors in common stocks near the end of calendar years has been proposed as an explanation for the turn-of-the-year effect in stock returns. Past analyses of this hypothesis have relied on inferential data. We provide here some direct data from a compilation of over 80,000 actual common stock investment round trips by a sample of 3000 individual investors. We find strong evidence of a concentration of loss-taking trades late in the year and milder evidence of a concentration just prior to the dates when investments become eligible for long-term tax treatment.

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