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Tax-Loss Selling and the January Effect: Evidence from Municipal Bond Closed-End Funds


  • Starks is at the McCombs School of Business, University of Texas at Austin, Yong is at the College of Business Administration, University of Texas at Arlington, and Zheng is at the Paul Merage School of Business, University of California, Irvine. The authors would like to thank Rob Stambaugh (the editor), an anonymous associate editor and an anonymous reviewer, as well as Andres Almazan, Daniel Bergstresser, David Brown, John Chalmers, David Dubofsky, Clifford Gladson, John Graham, Susan Ji, Bill Maxwell, James Poterba, Clemens Sialm, Jin Xu, and seminar participants at the University of Texas at Austin, the 2003 University of North Carolina Tax Symposium, and the 2005 American Finance Association Annual Meetings for comments and suggestions that have improved the paper.


This paper provides direct evidence supporting the tax-loss selling hypothesis as an explanation of the January effect. Examining turn-of-the-year return and volume patterns for municipal bond closed-end funds, which are held mostly by tax-sensitive individual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained by tax-loss selling activities at the previous year-end. Moreover, we find that funds associated with brokerage firms display more tax-loss selling behavior, suggesting that tax counseling plays a role.