Did the 1986 Tax Reform Act Affect Market Reactions to Stock Splits?: A Test of the Tax-Option Hypothesis

Manjeet S Dhatt, Yong H Kim and Sandip Mukherji

The Financial Review, 1997, vol. 32, issue 2, 249-71

Abstract: This paper tests the prediction of the tax-option hypothesis that the market impact of stock splits would be reduced by the 1986 Tax Reform Act which eliminated the difference between long- and short-term capital gains tax rates. The results show significant excess returns on stock split announcement and ex-days even after 1986. The announcement and ex-day excess returns are similar in different periods before and after the Act. Further, there is no significant relationship between announcement excess returns and increase in return volatility following splits. These findings are inconsistent with the tax-option hypothesis. Copyright 1997 by MIT Press.

Date: 1997
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