Path Dependent Earnings Response Caused by Capital Gains Tax Trading

32 Pages Posted: 5 Oct 2000

Date Written: August 15, 2000

Abstract

This article examines Constantinides-strategy capital gains tax trading during earnings announcements in a Kyle trading market. Capital gains taxes discourage shareholders from selling after a runup. On the other hand, capital loss offsets encourage selloffs after a crash. Accordingly, prices are path dependent and not Martingale: after a runup they are sticky against bad news; after a crash, they resist good news. As the focus of information-based trading, earnings announcements provide a ready setting for exhibiting the interplay of these tax implications with price efficiency.

Keywords: Earnings announcements; Tax trading; Tax arbitrage

JEL Classification: JEL M41, G14, H20, H21, H25, K34, D82

Suggested Citation

Yee, Kenton K., Path Dependent Earnings Response Caused by Capital Gains Tax Trading (August 15, 2000). Available at SSRN: https://ssrn.com/abstract=239369 or http://dx.doi.org/10.2139/ssrn.239369

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