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Do Tax Sensitive Investors Liquidate Appreciated Shares After a Capital Gains Tax Rate Reduction?

Chyz, James A. and Li, Oliver Zhen

Abstract:

Using data on institutional investors’ portfolio composition before and after the capital gains tax rate cut in the Taxpayer Relief Act of 1997, we find evidence that, relative to less tax sensitive institutional investors, tax sensitive institutional investors are more willing to sell appreciated equity in response to the rate cut. Further, the reduction in value invested in appreciated equity appears to be lasting, consistent with the tax rate cut lowering tax sensitive investors’ impediments to optimally balancing their portfolios. These results provide direct evidence of a capital gains tax lock-in effect.

Citation

Chyz, James A. and Li, Oliver Zhen (2012), Do Tax Sensitive Investors Liquidate Appreciated Shares After a Capital Gains Tax Rate Reduction?, National Tax Journal, 65:3, pp. 595-627

DOI: dx.doi.org/10.17310/ntj.2012.3.04