Market Valuation of Tax-Timing Options: Evidence from Capital Gains Distributions


  • J. B. CHAY,



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    • J. B. Chay is from the School of Business Administration at Sungkyunkwan University, Dosoung Choi is from the College of Business Administration at Seoul National University, and Jeffrey Pontiff is from the Wallace E. Carroll School of Management at Boston College. We have received valuable comments from an anonymous referee, Daniel Bergstresser, Charles Corrado, Rick Green, Larry Harris, Jennifer Koski, Li Jin, Helen Peters, James Poterba, Mike Sher, Terry Shevlin, and from workshop participants at the University of Arizona, University of Washington, Emory, Rice, University of California at Berkeley, Q-group Melbourne, Q-group Sydney, University of Melbourne, University of Auckland, University of Southern California, Boston College, National University of Singapore, Dallas Federal Reserve, Korea University, Korea Advanced Institute of Science and Technology, Sungkyunkwan University, Seoul National University, and the University of Missouri-Columbia. Chay acknowledges financial support from the Sungkyunkwan University 2003 Faculty Research Fund.


We examine a distribution that is taxed as a capital gain rather than as a dividend. Since the distribution induces a realized capital gain while the price change is an unrealized gain, ex-day return behavior provides evidence of the value of tax-timing capital gains. We show that investors are compensated 7¢ in unrealized gains for each dollar of realized capital gains, that is, $1 of realized capital gains is equivalent to 93¢ of unrealized gains. An investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%.