Capital gains taxes and asset prices: The impact of tax awareness and procrastination

Sebastian Eichfelder and Mona Lau

No 2014/17, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: We argue that the impact of capital gains taxation on asset pricing depends on the tax awareness of market participants. While institutional investors should be generally well-informed about tax regulations, private investors have only limited tax knowledge and resources. As a result, market reactions on tax law changes may be delayed if a considerable fraction of market participants is not fully tax-aware. In line with our argument, we find evidence that the introduction of a previously announced German flat tax on private capital gains in 2009 resulted in a temporarily strong and significant increase of trading volumes, daily returns and asset prices. Our research implies that tax law changes provide an opportunity for well-informed investors to generate arbitrage benefits. Corresponding to our estimate, the capital gains tax resulted in an increase demand for shares of 160 % as well as in an price surplus of about 7.4 % within the last two trading days 2008.

Keywords: capital gains tax; asset pricing; tax awareness; tax arbitrage (search for similar items in EconPapers)
JEL-codes: G01 H25 M41 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-fmk and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:201417

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