Tax Changes and Asset Pricing

Sialm, Clemens

doi:10.1257/aer.99.4.1356

Cited by 146 publications

(70 citation statements)

References 77 publications

(51 reference statements)

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“…The results in Table 2 are based on tax rates from 2015. Tax rates on investment income have varied significantly over time (e.g., Sialm 2009;Bergstresser and Pontiff 2013). Using historical tax rates, we analyzed the performance of tax-agnostic and tax-aware strategies; the results (unreported) correspond closely to the results obtained with the 2015 tax rates.…”

Section: Editor's Notementioning

confidence: 76%

Taxes, Shorting, and Active Management

Sialm

SosnerNathan²

2018

Financial Analysts Journal

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In our study, we analyzed the consequences of short selling for quantitative investment strategies held by individual investors in taxable accounts. The conventional wisdom is that the tax burden of an investment strategy increases with its turnover, because high-turnover strategies exhibit a higher propensity to realize capital gains. 1 Furthermore, short selling is often perceived to be particularly tax-inefficient because the realized capital gains on short positions are generally taxed at the higher short-term capital gains tax rate, regardless of the holding period. In this article, we show that, contrary to conventional wisdom, investment strategies that take advantage of short selling can generate relatively low tax burdens. Indeed, the addition of short positions probably enhances rather than diminishes the tax efficiency of quantitative investment strategies.One well-accepted method for managing the tax burden for individuals is to optimally time the realization of capital gains and losses, as first discussed in Constantinides (1983Constantinides ( , 1984. Investors can reduce their tax burden by accelerating capital losses and deferring capital gains. Deferring capital gains is beneficial under current law for several reasons: Long-term capital gains are taxed at a lower rate, the payment of taxes can be deferred, and the taxation of capital gains can be completely avoided when the assets pass through an estate (owing to the step-up of the cost basis at death) or are gifted to a charity. In contrast, it is advantageous to accelerate the realization of capital losses, which can be used to offset current or future capital gains in an overall portfolio. Realizing short-term losses is particularly beneficial because the short-term capital gains taxWe examine the consequences of short selling in the context of quantitative investment strategies held by individual investors in taxable accounts. Short positions not only allow investors to benefit from the anticipated underperformance of securities but also create tax benefits because they enhance opportunities to time capital gains realizations. Relaxing short-selling constraints results in tax benefits because a portfolio's long positions tend to realize net long-term capital gains taxed at relatively low rates, whereas short positions tend to realize net short-term capital losses, which can offset short-term capital gains from other strategies in the investor's portfolio. Our results show that investment strategies that take advantage of short selling can generate superior after-tax performance by significantly reducing the tax burden. Disclosures:The views expressed in this article are those of the authors and do not necessarily reflect the views of AQR Capital Management, LLC. Further information can be found at the end of this article.We are grateful for comments and suggestions by Stephen J. Brown (executive editor), Anthony Comprelli, CFA, George Constantinides, Jacques Friedman, Luis GarciaFeijóo, CFA, CIPM, Bryan Johnson, CFA, Hoon Kim, CFA, Mark Mc...

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Section: Editor's Notementioning

confidence: 76%

Taxes, Shorting, and Active Management

Sialm

SosnerNathan²

2018

Financial Analysts Journal

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“…145 For example, Naranjo et al (1998) find no evidence that statutory tax rates explain the yield effect, while find mixed evidence. Sialm (2009) presents some of the strongest evidence that tax rates affect expected returns, but his measure of tax burden commingles tax rates and dividend payouts. Ironically, the strongest evidence on dividend tax pricing comes from periods when tax-exempt investors made up a larger fraction of shareholders and the personal tax-disadvantage of dividends was lowest.…”

Section: Event Study Predictions: the Valuation Of A Dividend Tax Ratmentioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

1,893

595

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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“…The impact of shareholder taxes on asset prices and equity returns has been analyzed by a substantial body of literature (e.g. Sialm, 2008;Dai, Maydew, Shackelford and Zhang, 2008).…”

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Dividend Taxes and International Portfolio Choice

Desai

Dharmapala

2011

Review of Economics and Statistics

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This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by US investors towards equities in tax-favored countries. A difference-in-difference analysis that compares US equity holdings in affected and unaffected countries finds a substantial portfolio reallocation towards the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA.

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Tax Changes and Asset Pricing

Cited by 146 publications

References 77 publications

Taxes, Shorting, and Active Management

Taxes, Shorting, and Active Management

A review of tax research

Dividend Taxes and International Portfolio Choice

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