Capital Gains Taxes and the Market Response to Public Announcements in Alternative Tax Regimes

43 Pages Posted: 12 Dec 2008 Last revised: 1 Jun 2009

See all articles by Greg Clinch

Greg Clinch

Macquarie Business School

Mahmoud Odat

University of Technology, Sydney

Date Written: April 2009


In this paper we investigate the market price and trading volume response to a public announcement in two alternative capital gains tax regimes. The first regime applies a concessional tax rate to long-term gains and losses (the U.S.-style setting). The second regime provides concessional tax treatment via indexation of the cost base (the indexation regime). Our analysis indicates that in both regimes prices will be more responsive to a public signal than when no capital gains tax concessions are present. Moreover, the 'over responsiveness' induces negative correlation between short-term price changes around the public announcement and subsequent long-term price movements. In the U.S.-style setting this effect is greater the larger the differential between tax rates applied to long-term and short-term gains and losses. In the indexation regime the effect is greater when anticipated inflation is higher. Regarding trading volume, the two tax settings generate different effects. In the U.S.-style setting volume is decreasing in price changes around the announcement due to the inhibiting effect of traders wishing to avoid realizing short-term gains. In contrast, in the indexation setting volume is increasing in price change as higher prices provide greater anticipated (indexed) tax shields for the future.

Keywords: Capital Gains Tax, Public Announcements, Trading Volume

JEL Classification: G14, M40, H20

Suggested Citation

Clinch, Greg and Odat, Mahmoud, Capital Gains Taxes and the Market Response to Public Announcements in Alternative Tax Regimes (April 2009). Available at SSRN: or

Greg Clinch (Contact Author)

Macquarie Business School ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

Mahmoud Odat

University of Technology, Sydney ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007

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