Market Valuation of Tax‐Timing Options: Evidence from Capital Gains Distributions
- Author(s): J. B. CHAY, DOSOUNG CHOI, JEFFREY PONTIFF
- Published: Mar 09, 2006
- Pages: 837-865
- DOI: 10.1111/j.1540-6261.2006.00856.x
We examine a distribution that is taxed as a capital gain rather than as a dividend. Since the distribution induces a realized capital gain while the price change is an unrealized gain, ex‐day return behavior provides evidence of the value of tax‐timing capital gains. We show that investors are compensated 7¢ in unrealized gains for each dollar of realized capital gains, that is, $1 of realized capital gains is equivalent to 93¢ of unrealized gains. An investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%.