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

J. B. Chay, Dosoung Choi and Jeffrey Pontiff

Journal of Finance, 2006, vol. 61, issue 2, 837-865

Abstract: 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%.

Date: 2006
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