Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100028
Authors: 
Eichfelder, Sebastian
Lau, Mona
Year of Publication: 
2014
Series/Report no.: 
Discussion Paper, School of Business & Economics: FACTS 2014/17
Abstract: 
We argue that the impact of capital gains taxation on asset pricing depends on the tax awareness of market participants. While institutional investors should be generally well-informed about tax regulations, private investors have only limited tax knowledge and resources. As a result, market reactions on tax law changes may be delayed if a considerable fraction of market participants is not fully tax-aware. In line with our argument, we find evidence that the introduction of a previously announced German flat tax on private capital gains in 2009 resulted in a temporarily strong and significant increase of trading volumes, daily returns and asset prices. Our research implies that tax law changes provide an opportunity for well-informed investors to generate arbitrage benefits. Corresponding to our estimate, the capital gains tax resulted in an increase demand for shares of 160 % as well as in an price surplus of about 7.4 % within the last two trading days 2008.
Subjects: 
capital gains tax
asset pricing
tax awareness
tax arbitrage
JEL: 
G01
H25
M41
Document Type: 
Working Paper

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