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Tax-Motivated Trading and Price Pressure: An Analysis of Mutual Fund Holdings

Published online by Cambridge University Press:  06 April 2009

Scott Gibson ,
Assem Safieddine  and
Sheridan Titman
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Abstract

The 1986 Tax Reform Act (TRA) replaced non-synchronous tax year-ends with a common October 31 year-end for all mutual funds. After the TRA, we find that funds systematically accelerated the sale of losers prior to October 31. A similar pattern is not present for funds before the TRA, of for other types of institutions either befor or after the TRA. Examining stock returns in the first year the new TRA regulations became fully effective, we find evidence of a strong “November effect” for prior losers in which funds collectively had large holdings. Interestingly, fund managers appear to have learned from this experience. In subsequent years, our resuts suggest that funds were able to mitigate potential price pressures by having the foresight to spread tax-motivated sales over relatively long time horizons.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 3 , September 2000 , pp. 369 - 386
Copyright
Copyright © School of Business Administration, University of Washington 2000

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Footnotes

*

Gibson, Carlson School of Management, University of Minnesota, Minneapolis, MN 55455; Safieddine, Visiting Professor of Finance, Business School, Lebanese American University, Beirut, Lebanon; and Titman, College of Business Administration, University of Texas, Austin, TX 78712. We are grateful for valuable help and comments from Lawrence Benveniste, Carolyn Chase, Naveen Khanna, Mark Ready, Paul Seguin, Russ Wermers, Gabriel G. Ramirez (the referee), and seminar participants at the 1999 European Financial Management Association Meetings in Paris and the 1999 Financial Management Association Meetings in Orlando.

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