Tax‐Loss Selling and the January Effect: Evidence from Municipal Bond Closed‐End Funds

  • Author(s): LAURA T. STARKS, LI YONG, LU ZHENG
  • Published: Jan 11, 2007
  • Pages: 3049-3067
  • DOI: 10.1111/j.1540-6261.2006.01011.x

ABSTRACT

This paper provides direct evidence supporting the tax‐loss selling hypothesis as an explanation of the January effect. Examining turn‐of‐the‐year return and volume patterns for municipal bond closed‐end funds, which are held mostly by tax‐sensitive individual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained by tax‐loss selling activities at the previous year‐end. Moreover, we find that funds associated with brokerage firms display more tax‐loss selling behavior, suggesting that tax counseling plays a role.

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