Hostname: page-component-745bb68f8f-l4dxg Total loading time: 0 Render date: 2025-01-23T19:50:40.278Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Badrinath, S. G., and Wahal, S.. “Momentum Trading by Institutions.” Unpubl. Working Paper, Rutgers Univ. and Emory Univ. (1998).CrossRefGoogle Scholar
Berges, A.; McConnell, J. J.; and Schlarbaum, G. G.. “The Turn-of-the-year in Canada.” Journal of Finance, 39 (1984), 185–192.10.2307/2327675Google Scholar
Bhabra, H. S.; Dhillon, U. S.; and Ramirez, G. G.. “A November Effect? Revisiting the Tax-Loss-Selling Hypothesis.” Financial Management, 28 (1999), 5–15.10.2307/3666300CrossRefGoogle Scholar
Bogle, J. C. Bogle on Mutual Funds. New York, NY: Irwin, Richard D. (1994).Google Scholar
Brown, P.; Keim, D. B.; Kleidon, A.; and Marsh, T. A.. “Stock Return Seasonalities and the Tax-Loss Selling Hypothesis.” Journal of Financial Economics, 12 (1983), 105–127.10.1016/0304-405X(83)90030-2CrossRefGoogle Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Fund Performance with Characteristic Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1085.10.2307/2329515Google Scholar
Dyl, E. A. “Capital Gains Taxation and Year-End Stock Market Behavior.” Journal of Finance, 32 (1977), 165–175.10.2307/2326911Google Scholar
Falkenstein, E. G. “Preferences for Stock Characteristics As Revealed by Mutual Fund Portfolio Holdings.” Journal of Finance, 51 (1996), 111–135.10.2307/2329304CrossRefGoogle Scholar
Givoly, D., and Ovadia, A.. “Year-End Tax-Induced Sales and Stock Market Seasonality.” Journal of Finance, 38 (1983), 171–185.10.2307/2327645Google Scholar
Gompers, P. A., and Metrick, A.. “How are Large Institutions Different from Other Large Investors? Why do these Differences Matter?” Unpubl. Working Paper, Harvard Univ. (1998).CrossRefGoogle Scholar
Griffiths, M. D., and White, R. W.. “Tax-Induced Trading and the Turn-of-the-Year Anomaly: An Intraday Study.” Journal of Finance, 48 (1993), 575–598.10.2307/2328913Google Scholar
Grinblatt, M.; Titman, S.; and Wermers, R.. “Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior.” American Economic Review, 85 (1995), 1088–1105.Google Scholar
Hawawini, G., and Keim, D. B.. “On the Predictability of Common Stock Returns: World-Wide Evidence.” In Handbooks in Operations Research and Management Science: Finance, vol. 9, Amsterdam, Netherlands: Elsevier Science B. V. (1995), 497–544.Google Scholar
Jones, S. L.; Lee, W.; and Apenbrink, R.. “New Evidence on the January Effect before Personal Income Taxes.” Journal of Finance, 46 (1991), 1909–1924.10.2307/2328578CrossRefGoogle Scholar
Keim, D. B. “Trading Patterns, Bid-Ask Spreads, and Estimated Security Returns: The Case of Common Stocks at Calendar Turning Points.” Journal of Financial Economics, 25 (1989), 75–97.10.1016/0304-405X(89)90097-4CrossRefGoogle Scholar
Mutual Fund Directory. New York, NY: Investment Dealers Digest, Inc. (Spring 1987 and Spring 1990).Google Scholar
Mutual Fund Survey. New York, NY: Value Line, Inc. (1997).Google Scholar
Reinganum, M. R. “The Anomalous Stock Market Behavior of Small Firms in January: Empirical Tests for Tax-Loss Selling Effects.” Journal of Financial Economics, 12 (1983), 89–104.10.1016/0304-405X(83)90029-6CrossRefGoogle Scholar
Reinganum, M. R., and Shapiro, A. C.. “Taxes and Stock Return Seasonality: Evidence from the London Stock Exchange.” Journal of Business, 60 (1987), 281–295.10.1086/296396CrossRefGoogle Scholar
Roll, R. “Vas ist Das?: The Turn of-the-Year Effect and the Return Premia of Small Firms.” Journal of Portfolio Management, 9 (1983), 18–28.10.3905/jpm.9.3.18CrossRefGoogle Scholar
Sias, R. W., and Starks, L. T.. “Institutions and Individuals at the Turn-of-the-Year.” Journal of Finance, 52 (1997), 1543–1562.10.2307/2329446Google Scholar
Schultz, P. “Personal Income Taxes and the January Effect: Small Firm Stock Returns before the War Revenue Act of 1917: A Note.” Journal of Finance, 40 (1985), 333–343.10.2307/2328065CrossRefGoogle Scholar
Wermers, R. “Momentum Investment Strategies of Mutual Funds, Performance Persistence, and Survivorship Bias.” Unpubl. Working Paper, Univ. of Colorado at Boulder (1997).Google Scholar
Wermers, R. “Mutual Fund Herding and the Impact on Stock Prices.” Journal of Finance, 54 (1999), 581–622.10.1111/0022-1082.00118CrossRefGoogle Scholar