an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

a path dependent contingent claims approach to capacity investments this note presents a contingent claims approach to strategic capacity planning we develop models for capacity choice and expansion decisions in a single firm environment where investment is irreversible and demand is uncertain these models illustrate specifically the relevance of path dependent options analysis to planning capacity investments when the firm adopts demand tracking or average capacity strategies it is argued that asian average type real options can explain hysteresis phenomena in addition to providing superior control of assets in place

can tax loss selling explain the january seasonal in stock returns this paper analyzes the tax loss selling hypothesis as an explanation of the january seasonal in stock returns and argues that rational tax loss selling implies little relation between the january seasonal and the long term loss empirical results show that the january seasonal is as strongly related to the long term loss as it is to the short term loss the evidence is inconsistent with a model that explains the january seasonal by optimal tax trading

portfolio selection with capital gains tax recursive utility and regime switching capital gains taxation has important implications for investors portfolio choice decisions to explore these implications we develop a continuous time investment and consumption model with capital gains tax epstein zin recursive utility and regime switching we find that various factors such as tax rate risk aversion interest rate stock return and volatility jointly affect optimal portfolio allocation whereas intertemporal substitution does not in a regime switching market investors may trade or stop trading purely because of a change in regime and there is a distinct cross regime effect on optimal portfolio allocation in particular investors tend to raise stock investment in a bear regime so as to reduce potential tax payments upon regime switching given reasonable parameter values regime switching has a greater impact on optimal portfolio allocation in a bear regime than in a bull regime this paper was accepted by neng wang finance

return seasonality in stocks and their underlying assets tax loss selling versus information explanations results of tests contrasting tax loss selling with intertemporal information variation as explanations of the january seasonal in stock returns are reported closed end fund shares display the typical size related january seasonal while their net asset values do not interpreting the net asset value return as a proxy for information about underlying assets this result indicates information variation is not a necessary condition for the january effect in stocks the share returns at the turn of the year are negatively related to their mean preceding year returns and positively related to the standard deviations of their preceding year returns these results are consistent with tax loss selling article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

evaluation and optimization of feed in tariffs abstract feed in tariff program is an incentive plan that provides investors with a set payment for electricity generated from renewable energy sources that is fed into the power grid as of today fit is being used by over 75 jurisdictions around the world and offers a number of design options to achieve policy goals the objective of this paper is to propose a quantitative model by which a specific fit program can be evaluated and hence optimized we focus on payoff structure which has a direct impact on the net present value of the investment and other parameters relevant to investor reaction and electricity prices we combine cost modeling option valuation and consumer choice so as to simulate the performance of a fit program of interest in various scenarios the model is used to define an optimization problem from a policy maker s perspective who wants to increase the contribution of renewable energy to the overall energy supply while keeping the total burden on ratepayers under control numerical studies shed light on the interactions among design options program parameters and the performance of a fit program

the effect of business risk on corporate capital structure theory and evidence under corporate and personal taxation we demonstrate that the relation between optimal debt level and business risk is roughly u shaped this result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option therefore the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options results of empirical tests offer support for the predicted u shaped relationship

trading and valuing depreciable assets abstract optimal policies for selling a risky depreciable asset with proportional taxes and transaction costs are derived for a representative investor who maximizes the market value of his investment also calculated are the market value of his investment and the competitive price of the depreciable asset depending upon the values of various parameters the investor realizes either capital gains and no losses capital losses and no gains or neither gains nor losses additional properties of the solution are derived numerically

tax induced trading the effect of the 1986 tax reform act on stock market activity the end of favorable tax treatment for long term capital gains caused investors to reassess traditional tax induced trading strategies this study compares trading behavior in december 1986 and january 1987 with previous years our results indicate that these tax code changes had a powerful effect on trading behavior relative trading volume was considerably higher in december 1986 for long term winners but not significantly lower for long term losers results also indicate altered trading patterns based on shortterm gains in december 1986 and for long term winners in january 1987 the most sweeping revision of the united states tax code in many years became law in september 1986 one key aspect of that law was the elimination of the favorable tax treatment of long term capital gains under prior law capital gains on assets held at least six months were generally1 taxed at only forty percent of the rate applied to ordinary income under the new tax law assets sold after december 31 1986 are to be taxed with a few exceptions 2 at the same rate at which ordinary income is taxed this change represented the largest capital gains tax rate increase in at least half a century the purpose of this study is to assess the short run investor reaction to this change in the tax treatment of capital gains the nearly four month lag between the passage of the legislation and the effective date of the tax rate change gave investors ample opportunity to assess the law s consequences for their portfolios and adjust their behavior accordingly since investors are seeking to maximize the risk adjusted after tax return on their portfolio this record increase in capital gains tax rates is likely to induce significant changes in investment strategy the extreme sensitivity of capital gains realizations to the capital gains tax rate by holders of common stock has been frequently demonstrated a permanent or long term and recurring investor response is evidenced by the findings of

most favored customer protection versus price discrimination over time how should a seller price capacity that has no salvage value to heterogeneous customers whose valuations are private information there are two periods and the seller cannot precommit to prices in the later period one option is price discrimination first price high then discount later if excess capacity remains by offering most favored customer protection the seller can charge more in advance but will leave capacity unsold with positive probability she favors the mfc protection when capacity is large and leans toward price discrimination when customers are more uncertain about the degree of excess demand in the first period

does anticipated information impose a cost on risk averse investors a test of the hirshleifer effect this paper theoretically and empirically investigates how the risk of future adverse price changes created by the anticipated arrival of information influences risk averse investors trading decisions in institutionally imperfect capital markets specifically i examine how the selling activity of individual investors immediately following an earnings announcement is influenced by the tradeoff between risk sharing benefits of immediate trade and explicit transaction costs imposed on such trades consistent with my theoretically derived predictions i find that investors current trading decisions are less sensitive to the incremental transaction costs created by short term capital gains taxes on trading profits as both the duration and intensity of the risk of future adverse price changes increase this evidence is consistent with an incremental cost to investors that results from the revelation of precise information which is commonly referred to as the hirshleifer effect

market line deviations and market anomalies with reference to small and large firms previous anomaly research may have misinterpreted corrected for the market index mean returns on small firms assuming mean variance preferences it is shown theoretically that corrected mean returns i e market line deviations are not indicative of the relative desirability of increasing the proportional investment in small firms the correct improvement criterion is derived and estimated tests indicate that the value weighted market index is not significantly improved with greater weight on small firms in the aver age month when seasonality is considered the observed performance improvements due to small or large firms are significant in some months but the required portfolio position is unclear if a case exists for a small firm anomaly in january it probably exists in other months and it also exists for large firms it is doubtful whether such an anomalous stock market exists

real options valuation of forest plantation investments in brazil abstract in this paper we consider investments in eucalyptus plantations in brazil for such projects we discuss real options valuation in the place conventional methods such as irr or npv possibly with capm traditionally real options valuation assumes complete markets and neglects market imperfections yet market frictions such as transaction costs interest rate spreads and restricted short positions can play an important role we extend real options valuation to allow incomplete and imperfect markets the value is obtained as a competitive price given markets of competing investment opportunities such as real and financial assets under perfect and complete markets such valuation method is consistent with conventional real options theory stochastic programming and standard software is used for valuation of eucalyptus plantations we estimate the underlying interdependent diffusion processes of stock market interest rates exchange rates and pulpwood price and derive novel expressions of stochastic integrals to be employed in scenario generation for discrete time stochastic programming

errors in recorded security prices and the turn of the year effect errors in recorded security prices are a source of misspecification in the market model if recorded price errors are sufficiently nonrandom they result in biased returns and in biased and inconsistent estimates of market model regression coefficients this paper argues that tax induced flow supply pressures cause end of the year recorded price errors to be nonrandom enough to create the appearance of anomalous turn of the year stock return behavior empirical tests of returns and market model regression coefficients during the turn of the year period cannot reject this errors in variables explanation of the turn ofthe year effect the turn of the year toy effect or january effect refers to the anomal ous behavior of stock returns during the last five trading days in december and the first five trading days in january this anomaly is of particular interest to financial researchers because it appears to be a small firm effect and the source of the majority of size related anomalies see keim 1985 reinganum 1981 and roll 1983a 1983b the interest in the toy effect is justified because of its implications concerning the validity of the capital asset pricing model capm and market efficiency in this paper we show that there is a price related effect operating during the toy period first we show that the magnitude of the toy return is inversely related to price when we control for price most of the size related toy effect found by reinganum 1983 and roll 1983a disappears second the data indicate that all firms have unusually high returns during the toy period compared with their returns during the rest of the year third we find seasonal shifts in the market model betas associated with the toy period furthermore we test the hypothesis that the toy effect is an errors in variables problem due to the use of the one eighth pricing convention in recording security prices and the accommodation of tax induced flow pressures by liquidity traders such as market

the capital gain lock in effect and perfect substitutes abstract this paper analyses the effect of investors accrued capital gains on optimal portfolio composition and equilibrium returns under the assumption that investors are able to re balance with perfect substitute securities no dominance arguments are used to show that pricing differences because of accrued capital gains do not arise among securities which are perfect substitutes these arguments are insufficient however to prevent pricing differences because of accrued capital gains among securities which are not perfect substitutes trading rules are developed which outline the conditions necessary for the realisation of accrued capital gains and the deferral of capital losses these trading rules also provide guidance on which securities investors should sell given their tax basis when re balancing their portfolios

up close and personal investor sophistication and the disposition effect this paper analyzes the trading records of a major discount brokerage house to investigate the disposition effect the tendency to sell stocks that have appreciated in price winners sooner than stocks that trade below the purchase price losers in contrast to previous research that has demonstrated the disposition effect by aggregating across investors our main objective is to identify differences in the disposition bias across individuals and explain this in terms of underlying investor characteristics building on the findings in experimental economics and social psychology we hypothesize that differences in investor literacy about financial markets and trading frequency are responsible in part for the variation in individual disposition effect using demographic and socioeconomic variables as proxies for investor literacy we find empirical evidence that wealthier individuals and individuals employed in professional occupations exhibit a lower disposition effect consistent with experimental economics trading frequency also tends to reduce the disposition effect we provide guidelines for investment advisors regulators and investment communities to utilize our findings and help investors make better decisions

measuring permanent responses to capital gains tax changes in panel data the authors use panel data and information about differences in state tax rates to separate the effects of transitory and permanent tax rate changes on capital gains realizations behavior the estimated effect of permanent change is substantially smaller than the effect of transitory change the difference is even larger than differences between estimates from past micro data studies which have primarily measured the transitory effect and time series studies which have primarily measured the permanent effect the authors results resolve a long standing conflict between micro data and time series studies of how marginal tax rates affect capital gains realizations behavior copyright 1994 by american economic association

the capm and equity return regularities differential returns on dividend and capital gains income systematic abnormal returns surrounding ex dividend dates excess returns on small versus large capitalization stocks excess returns on low versus high price earnings ratio stocks these are among the recent findings that cast doubt on the traditional capital asset pricing model and tease investors with the promise of systematic excess returns some of these effects are undoubtedly related tests indicate for example that the higher a portfolio s price to book ratio the higher the corresponding values of market capitalization pie and stock price furthermore p e dividend yield price and pie effects all experience significant january seasonals what has not been conclusively determined is whether the effects are additive so far it appears that the dividend yield and size effects are not mnutually exclusive investors may want to use a strategy employing several of these characteristics rather than one efforts to explain the size effect have focused on january because the effect is concentrated in that month the most common hypothesis attributes this to year end tax loss selling but the evidence is less than conclusive evidence strongly suggests however that among small firms those with the largest abnormal returns tend to be the firms that have recently become small that either don t pay dividends or have higher dividend yields and that have lower prices and low pie ratios

do after tax returns affect mutual fund inflows abstract this paper explores the relationship between the after tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds previous studies have documented that funds with high pretax returns attract greater inflows this paper presents evidence based on a large sample of retail equity mutual funds over the period 1993 1999 that after tax returns have more explanatory power than pretax returns in explaining inflows in addition funds with large overhangs of unrealized capital gains experience smaller inflows all else equal than funds without such unrealized gains a large capital gain overhang discourages both gross fund inflows and gross outflows but the inflow effect dominates the outflow effect

risk returns and values in the presence of differential taxation abstract we show that there exist separate security market lines smls for debt and equity securities in an equilibrium with differential taxation of debt and equity we characterize the conditions under which these smls have the same price of risk with different intercepts and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method we explore the implications of our results for cost of capital calculations how to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation

the turn of the year in canada a number of investigators have reported that january stock returns in the u s exceed returns for other months of the year this paper documents a similar finding for canadian stocks over the period 1951 1980 however canada did not introduce a capital gains tax until 1973 and the paper reports that january returns in canada exceed returns for other months of the year before and after this date thus these data do not support the tax loss selling pressure hypothesis as the entire explanation for the turnof the year effect in stock returns nor by implication do they support the tax lossselling pressure hypothesis as the complete explanation for the small firm effect in u s stocks returns recently keim 9 has reported that returns on nyse and ase firms with small market values exceed by significant margins returns on firms with large market values this result was previously reported by banz 1 and reinganum 11 but keim s analysis shows that most of the excess return for small firms is concentrated in january indeed it is concentrated in the first two weeks in january roll 13 also documents this phenomenon and investigates a number of possible explanations for it 2 after rejecting several possible nonexploitable explanations roll is left with year end tax loss selling pressure of the sort discussed by branch 2 dyl 5 and givoly and ovadia 6 as the most likely explanation of this result according to the tax loss selling pressure hypothesis toward the end of the year stockholders sell stocks that have declined in price during the year investors do this to take advantage of the opportunity to write off capital losses against ordinary income in computing their federal income taxes the year end sell off exerts downward pressure on stock prices as soon as the tax and calendar year ends the selling pressure is relieved and stock prices quickly rebound to their equilibrium levels roll 13 presents some evidence consistent with this hypothesis specifically he finds a negative correlation between stock returns in january and returns over the previous 12 months that is stocks that decrease in value during the year tend to be big gainers in january roll also finds that

capital gains taxes and asset prices capitalization or lock in this paper demonstrates that the equilibrium impact of capital gains taxes reflects both the capitalization effect i e capital gains taxes decrease demand and the lock in effect i e capital gains taxes decrease supply depending on time periods and stock characteristics either effect may dominate using the taxpayer relief act of 1997 as our event we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock in effect in the week after the rate reduction became effective this paper jointly tests two effects of capital gains taxation on equity trading a demand side capitalization effect and a supply side lock in effect while previous studies have tested these effects separately to the best of our knowledge this is the first study to evaluate them jointly and empirically document the relative dominance of each effect surrounding a change in a tax rate employing an equilibrium approach we show that these effects net tax impact on asset prices is ambiguous evaluating returns and trading volume around the 1997 reduction in the capital gains tax rate we find evidence that the capitalization and the lock in effects jointly affect trading in particular the capitalization effect dominates the lock in effect in the week following an increase in the probability of a reduction in the capital gains tax rate as buyers respond to information that future capital gains tax rates will be lower the lock in effect however dominates the capitalization effect after the rate reduction actually becomes effective taxation is one of the most prevalent market frictions in financial markets affecting investors decisions and distorting the valuation of assets capital gains taxes in particular play an important role in determining an investor s trading strategies and can ultimately affect asset prices because investors

emergent complexity in agent based computational economics abstract in this paper we shall review two kinds of emergent complexity in agent based computational economics ace the first kind is based on the complex systems initiated in the 1980s or even earlier by mathematicians and physicists whereas the second kind is based on the idea of complex adaptive systems composed of autonomous agents for which many representative works have been collected in rosser for the latter we shall go further to examine the two elements which have just recently been incorporated in agent based economic modelling namely intelligence and modularity this augmentation leads to the development of neurocognitive software agents which can guide the generation and direction of future ace studies with a multistage brain behaviour to emergency to brain behaviour approach

taxable and tax deferred investing a tax arbitrage approach we analyze an intertemporal portfolio problem with both taxable and tax deferred retirement accounts using a tax arbitrage argument we identify conditions under which the optimal location decision where to place an asset is separable from the allocation decision how much to allocate to each asset investors place highly taxed assets in the tax deferred account to maximize the tax benefit and adjust their taxable portfolios to achieve the optimal risk exposure we show that the two account problem can be reduced to a taxable account only problem the results are robust to capital gains tax deferrals consumption and contribution decisions and stochastic tax rates

how burdensome are capital gains taxes abstract this paper uses capital gain realization data from individual tax returns to evaluate recent claims that sophisticated portfolio strategies permit investors to avoid capital gains taxes the results suggest important investor heterogeneity twenty percent of taxpayers with capital gains or losses face binding loss offset constraints another significant group of investors evades the capital gains tax prior to recent legislative changes forty percent of capital gains were unreported finally about forty percent of capital gains accrue to investors who report capital gains and face significant tax burdens as the traditional analysis of the capital gains tax suggests

seasonal and size anomalies in the japanese stock market little attention has been paid by the academic community in the united states to the japanese stock market and its structure japan has the second largest economy in the western world and the tokyo stock exchange tse is second only to the new york stock exchange nyse in terms of aggregate market values and sales volume analysis of the japanese stock market is useful given its relative importance but in addition examination of the japanese market may offer insights into controversies surrounding u s markets this study focuses on two such current controversies the january and size anomalies

seasonal fluctuations in industrial production and stock market seasonals february and august peaks in the growth rates of the seasonally unadjusted industrial production index follow the stock market peaks documented by rozeff and kinney 1976 by one month coefficients on one month lead growth rates in industrial production for small firms are positive and significant in time series regressions even in the presence of the market factor moreover whereas returns on large firms stocks unidirectionally gran ger cause i e predict future growth rates in industrial production at least six months in advance returns on small firms stocks reflect one month lead as well as past growth rates in industrial production for these reasons we argue that seasonal real growth provides a partial explanation for the january stock seasonal among small firms

capital gains taxation and stock market activity evidence from ipos prior to the tax reform act of 1986 tra 86 long term capital gains were taxed at a lower rate than short term gains presenting investors with an opportunity to increase their after tax return by delaying the sale of appreciated assets until after they qualified for long term status and selling depreciated assets prior to long term qualification using a sample of initial public offerings i find that stocks that appreciated prior to long term qualification exhibit increased volume and decreased returns just after their qualification date while stocks that depreciated prior to long term qualification exhibit these effects just prior to their qualification date it is generally acknowledged that capital gains taxes influence investor behavior slemrod 1982 dyl 1979 chaplinsky and seyhun 1990 and others agree that individuals rationally respond to specific provisions of the tax code in attempting to reduce the tax liability of investment income recently this view has entered the public policy debate concerning the effective date of a proposed capital gains tax cut for example the wall street journal reported that congress has considered making proposed capital gains tax cuts retroactive to avoid possible market disruptions that might come from investors delaying transactions in anticipation of a future effective date wsj february 19 1997 despite the consensus view that capital gains taxes influence investment behavior specific distortions in behavior are difficult to document empirically one reason for the lack of evidence regarding the distortionary effect of capital gains taxes is that it is extremely difficult for researchers to determine the initial cost and the date of purchase of an asset without that information it is impossible for the investigator to know when an investor is trading a longterm or short term asset and whether he is realizing a gain or a loss one class of assets for which it is possible to obtain this information is initial public offerings of common stock ipos by definition ipos are not available for purchase prior to their offer date on the offer date shares are

tax motivated trading by individual investors we study the stock trades of a large number of individual investors to investigate how tax incentives affect the realization of capital gains and losses we compare investors realization behavior in their taxable and tax deferred accounts and thereby identify the effect of taxes on trading decisions we reach four conclusions first we find clear evidence of a lock in effect for capital gains in taxable accounts relative to tax deferred accounts we find evidence of the disposition effect the tendency for investors to hold losses and sell gains in both types of accounts and especially at short holding periods the lock in effect is stronger for large stock transactions than for small ones second we find tax loss selling throughout the calendar year though it is most pronounced in december tax loss trading is more pronounced among investors who have realized capital gains elsewhere in the portfolio during the year third we observe substantial heterogeneity in individual investors propensity to trade controlling for this heterogeneity however does not alter the relation between a stock s past performance and the realization decision finally we find that relatively few investors repurchase stocks that they have sold at a loss even after the 30 day wash sale holding period has expired

affective decision making a theory of optimism bias abstract optimism bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk and uncertainty such as expected utility theory subjective expected utility and prospect theory we therefore propose an alternative model of risky and uncertain choice where decision weights affective or perceived risk are endogenous affective decision making adm is a strategic model of choice under risk and uncertainty where we posit two cognitive processes the rational and the emotional process the two processes interact in a simultaneous move intrapersonal potential game and observed choice is the result of a pure strategy nash equilibrium in this game we show that regular adm potential games have an odd number of locally unique pure strategy nash equilibria and demonstrate this finding for affective decision making in insurance markets we prove that adm potential games are refutable by axiomatizing the adm potential maximizers

optimal portfolio choice with wash sale constraints abstract we analytically solve the portfolio choice problem in the presence of wash sale constraints in a two period model with one risky asset our results show that wash sale constraints can heavily affect portfolio choice of investors with unrealized losses the trading behavior of such investors is to a large extent driven by the desire to realize those losses either immediately by sharply decreasing the holding of assets carrying unrealized losses or indirectly by increasing such holdings in order to prepare for a decrease in a future period to earn the tax rebate payment our findings are robust to increasing the number of trading dates and introducing a second risky asset and a correlation structure

taxes and stock return seasonality evidence from the london stock exchange prior to the introduction of capital gains taxes seasonality is not detected in the returns of firms that traded on the london stock exchange however after the imposition of a capital gains tax the british stock return data exhibit apparent monthly effects in both jan uary and april additional analysis reveals that while the april effect is consistent with the tax loss selling hypothesis the january effect cannot be attributed solely to the introduction of capital gains taxation furthermore the authors efforts indicate that much caution should be exercised when interpreting studies that compare results from non u s data sources with those from u s data copyright 1987 by the university of chicago

addiction and cue triggered decision processes we propose a model of addiction based on three premises 1 use among addicts is frequently a mistake 2 experience sensitizes an individual to environmental cues that trigger mistaken usage 3 addicts understand and manage their susceptibilities we argue that these premises find support in evidence from psychology neuroscience and clinical practice the model is tractable and generates a plausible mapping between behavior and the characteristics of the user substance and environment it accounts for a number of important patterns associated with addiction gives rise to a clear welfare standard and has novel implications for policy

portfolio investment with the exact tax basis via nonlinear programming computing the optimal portfolio policy of an investor facing capital gains tax is a challenging problem because the tax to be paid depends on the price at which the security was purchased the tax basis the optimal policy is path dependent and the size of the problem grows exponentially with the number of time periods dammon et al 2001 2002 2004 garlappi et al 2001 and gallmeyer et al 2001 address this problem byapproximating the exact tax basis by the weighted average purchase price our contribution is threefold first we show that the structure of the problem has several attractive features that can be exploited to determine the optimal portfolio policy using theexact tax basis via nonlinear programming second we characterize the optimal portfolio policy in the presence of capital gains tax when using theexact tax basis third we show that the certainty equivalent loss from using the average tax basis instead of the exact basis is very small it is typically less than 1 for problems with up to 10 periods and this result is robust to the choice of parameter values and to the presence of transaction costs dividends intermediate consumption labor income tax reset provision at death and wash sale constraints

a dual self model of impulse control we propose that a simple dual self model gives a unified explanation for several empirical regularities including the apparent time inconsistency that has motivated models of quasi hyperbolic discounting and rabin s paradox of risk aversion in the large and small the model also implies that self control costs imply excess delay as in the o donoghue and rabin models of quasi hyperbolic utility and it explains experimental evidence that increased cognitive load makes temptations harder to resist the base version of our model is consistent with the gul pesendorfer axioms but we argue that these axioms must be relaxed to account for the effect of cognitive load

the courage of misguided convictions the field of modern financial economics assumes that people behave with extreme rationality but they do not furthermore people s deviations from rationality are often systematic behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable systematic and very human departures from rationality into standard models of financial markets we highlight two common mistakes investors make excessive trading and the tendency to disproportionately hold on to losing investments while selling winners we argue that these systematic biases have their origins in human psychology the tendency for human beings to be overconfident causes the first bias in investors and the human desire to avoid regret prompts the second

dividend distributions and closed end fund discounts abstract empirical support for the hypothesis that closed end fund discounts are related to overhanging tax liabilities has been mixed we introduce a new approach to testing this hypothesis by examining changes in discount levels following distributions of dividends and capital gains since distributions reduce future shareholder tax liabilities the tax liability hypothesis implies that closed end fund discounts should decline following distributions focusing on changes in discounts isolates this tax effect by eliminating the impact of other fund specific factors on discount levels our results support the tax liability hypothesis showing that short run fluctuations in discounts are directly affected by taxable distributions

market valuation of tax timing options evidence from capital gains distributions 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 7c in unrealized gains for each dollar of realized capital gains that is 1 of realized capital gains is equivalent to 93c 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 capital gains taxes can be deferred until assets are sold this feature provides the investor who purchases a security with an option regarding the timing of the realization of capital gains and losses this option can be used to lower one s expected tax liability even if capital gains tax rates remain constant for different holding periods an investor who delays the realization of a gain effectively enjoys compound returns on the postponed taxes if capital losses are tax deductible or partially tax deductible tax timing is even more valuable since investors can follow the strategy of selling stocks with capital losses early while postponing the sale of winners recent evidence lends support to the contention that some investors respond to this tax timing option for example odean 1998 shows that u s investors are more likely to sell losers in december than other months similarly grinblatt and keloharju 2002 show that at the end of the tax year finnish investors are more likely to realize losses than gains this type of tax motivated trade seems to affect market returns as shown by poterba and weisbenner 2001 who demonstrate that end of year tax loss selling is related to return variation in the month of january

can tax loss selling explain the january effect a note the january effect remains an unexplained phenomenon in financial economics that the month of january has consistently shown higher mean stock returns than other months has been documented by several researchers beginning with rozeff and kinney 19 additional research by keim 14 showed that approximately half the annual size effect is attributable to abnormal returns in january 1 roll 18 confirmed keim s results as has subsequent research such as lakonishok and smidt 15 2 the most often advanced explanation for the january effect is tax motivated transactions 3 first proposed in 1942 by wachtel 21 the tax loss selling hypothesis is frequently advocated in the popular press as a major influence on stock price behavior essentially this hypothesis states that investors seek to reduce their taxes by realizing losses at year end thereby depressing stock prices stocks return to equilibrium levels after year end providing abnormally high returns in january despite the popularity of the tax loss selling hypothesis it is difficult to justify upon serious reflection justification requires acceptance of the proposition that speculators are prevented from purchasing tax loss candidates before year end with the intention to sell them after year end no theoretical justification has been presented for the hypothesis instead using both theoretical and empirical approaches constantinides 5 argues that such action cannot explain the january effect if the market is efficient 4 his results imply that empirical studies supporting the tax loss selling hypothesis provide evidence of market inefficiency as for the empirical evidence branch 3 dyl 8 roll 18 reinganum 17 and givoly and ovadia 10 have provided support for the tax loss selling hypothesis 5 recently schultz 20 tested the tax explanation by examining the

debt and taxes and uncertainty with a graduated personal tax schedule miller showed that there could be an equilibrium debt supply for the corporate sector as a whole in the presence of uncertainty there is also a unique debt equity ratio for each individual firm and this ratio is related to the firm s operational risk characteristics however if firms merge and spin off in response to tax incentives the identity of firms is ambiguous and only the corporate sector is a meaningful construct these arguments are developed in both discrete and continuous models that employ extensions of the arbitrage free pricing theory in his famous paper debt and taxes 1977 merton miller 11 showed that the original miller modigliani propositions on the irrelevance of capital structure were not necessarily overturned by considerations of taxation miller argued that with a broad enough span of progressivity in personal income taxation the corporate tax advantage to the issuance of debt would be offset by the disadvantage to investors of receiving ordinary income on personal account in equilibrium the differential rates of return on equity and debt would be such that the marginal investor would be indifferent between purchasing debt instruments or equity the margin would be determined by the total amount of debt issued by the corporate sector but in a competitive world it would be unaffected by the debt issued by any one firm as a consequence the total supply of corporate debt would be determined in equilibrium increasing to the point where aggregate corporate value was not enhanced by further debt financing but any individual firm would be looking at prices set at the margin and would find itself indifferent between issuing debt or equity the purpose of this article is to extend miller s argument by recognizing the differences between debt and equity when the environment is not certain we will not be concerned with what might be called corner questions i e with whether or not there is a marginal investor or an internal equilibrium to do so would obscure the basic points we have to make instead we will examine models that have internal equilibria and ordinary neoclassical marginal interpretations in related work de angelo and masulis 5 6 have also extended miller s analysis but their primary concern was with the effects of a more detailed treatment of the tax code and with the impact of bankruptcy we will deal with such matters only in passing our central concern is with the impact of uncertainty our main result is the finding that there is a relationship between the capital structure of the firm as induced by tax effects and ordinary beta measures

new evidence on the impact of tax loss selling on the turn of the year effect abstract the turn of the year effect is an empirical regularity which refers to the observation that equity returns on days around the turn of the calendar year are significantly high a common explanation for the effect is the tax loss selling hypothesis three studies have tested this hypothesis by examining equity returns before and after the introduction of the war revenue act of 1917 however these studies have reached inconsistent conclusions following these inconsistent findings this paper examines whether the previous findings are robust to the extension of the pre tax period or whether the previous findings are robust to the use of daily data in contrast to the evidence from existing research which has used daily data a significant turn of the year effect is found prior to 1917 furthermore this effect is shown to be independent of other empirical regularities such as the turn of the month effect and the holiday effect and seasonality in dividend payments cannot explain the finding thus we conclude that the tax loss selling hypothesis cannot offer a complete explanation of the turn of the year effect

the construction of tender offers capital gains taxes and the free rider problem shareholders are less likely to tender shares in the first stage of a two tier offer than in an any or all offer this is inconsistent with the view that two tier offers overcome the free rider problem this article shows that two tier offers with a fully taxable first stage and a nontaxable second stage are structured to induce shareholders with low capital gains tax liabilities to accept the first stage and shareholders with high capital gains tax liabilities to accept the second stage in offers where both the first and second stage compensations are taxable high tendering rates occur in the first stage copyright 1988 by the university of chicago

theories of the mind economics has traditionally relied on revealed preferences and occasionally on verbal reports to understand the desires of people another source of information has been developed in recent years the direct observation of choice processes this mechanism possible thanks to the improvements in the designs and techniques to measure brain activity is explored in the bur geoning field of experimental neuroeconom ics see paul w glimcher and aldo rustichini 2004 and colin camerer george loewenstein and drazen prelec 2005 for recent surveys in this article we argue that the evidence on brain activity can also be used to build theo retical models that help us understand choices and predict behaviors we label this research neuroeconomic theory in section i we describe the procedure discuss some advan tages over traditional methodologies and estab lish some facts that motivate our approach in section ii we illustrate the methodology with two brain based models of decision making i what is neuroeconomic theory neuroeconomic theory is an interdisciplin ary line of investigation that combines research from neuroscience neurobiology and econom ics experimental neuroscience and neurobiology provide detailed evidence of the functionality interconnectivity and physiological constraints of the brain systems involved in decision making microeconomic theory supplies the toolkit to build simple optimization models that incorporate these network interactions and well defined con straints into the mechanisms of choice

stock prices and volume the authors undertake a comprehensive investigation of price and volume co movement using daily new york stock exchange data from 1928 to 1987 they adjust the data to take into account well known calendar effects and long run trends to describe the process they use a seminonparametric estimate of the joint density of current price change and volume conditional on past price changes and volume four empirical regularities are found 1 positive correlation between conditional volatility and volume 2 large price movements are followed by high volume 3 conditioning on lagged volume substantially attenuates the leverage effect and 4 after conditioning on lagged volume there is a positive risk return relation article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tax induced trading and the turn of the year anomaly an intraday study this study tests the tax induced trading hypothesis as an explanation of the turn of the year anomaly using canadian and u s intraday data since the canadian tax year end precedes the calendar year end by five business days tax effects may be isolated we find the anomaly is related to the degree of seller and buyer initiated trading and depends upon the incidence of the taxation year end seller initiated transactions at bid prices dominate until the tax year end after which buyer initiated trades at ask prices dominate the anomaly is a function of bid ask prices

seasonality in canadian stock prices a test of the tax loss selling hypothesis a popular hypothesis to explain the anomalous january returns of common stocks is based on the argument that there is considerable tax loss selling by investors toward the end of the year the purpose of this study is to test the tax loss selling hypothesis with data on canadian stocks although the introduction of capital gains tax in canada seems to have affected the behavior of stock returns the findings do not support the proposition that taxinduced trading is the sole cause ofthe seasonality in stock returns in canada i introduction over the past several years a number of studies have shown that the returns on common stocks in general and the stocks of small companies in particular tend to be abnormally high during the month of january keim 10 demonstrated quite clearly that a very high percentage of the abnormal positive returns gener ated on stocks with low market capitalizations occurs during january with the returns during the first five trading days of the year accounting for most of the anomalous behavior his results were recently confirmed by roll 14 who re ported that around 37 percent of the annual differences in the returns on the equally weighted and value weighted indices of nyse and amex stocks is ac counted for by what happens in the five trading days from the last trading day in december through the fourth trading day in january a popular hypothesis to explain the so called january effect in stock re turns is based on the argument that there is considerable end of the year tax lossselling by investors originally proposed by wachtel 19 it asserts that inves tors try to realize losses towards the end of the year to reduce their taxes thereby putting downward pressure on stock prices according to the hypothesis once

managerial ability compensation and the closed end fund discount this paper shows that the existence of managerial ability combined with the labor contract prevalent in the industry implies that the closed end fund discount should exhibit many of the primary features documented in the literature we evaluate the model s ability to match the quantitative features of the data and find that it does well although there is some observed behavior that remains to be explained the role of delegated portfolio managers in financial markets has puzzled

primes and scores an essay on market imperfections this paper investigates the reported relative mispricing of primes and scores to the underlying stock given transaction costs we establish arbitrage based bounds on prime and score prices we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds we find that prime and score prices do exceed stock prices and often by a considerable amount we demonstrate that this increased value is most likely due to the score s ability to save on the costs of dynamic hedging we also show how short sale and trust size constraints impede the ability to arbitrage price disparities in an efficient market the price of a security reflects the value of its underlying assets it should not be possible therefore to create value simply by splitting a security into different parts since the underlying assets are unchanged the packaging of the cash flows should not matter the recent introduction of primes and scores suggests that this is not always the case by separating a security s cash flows into a dividend based component the prime and an appreciation or option based component the score developers of these securities have seemingly created two assets whose value separately exceeds that of the original stock since the prime and the score are based on the same underlying asset this raises a puzzling question about the actual efficiency of securities markets this paper investigates this anomaly by examining whether primies and scores are actuauy mispriced and if so why given the costs of transacting in the prime score and stock we establish bounds on prime and score prices that are consistent with no arbitrage opportunities we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds this nonparametric procedure is designed both to confront the measurement error problems plaguing the literature i e nonobservable bid ask prices and nonsimultaneous prices see phillips and smith 1980 bhattacharya 1983 and bookstaber 1981 and to avoid the estimation of round trip transaction costs commissions we find the surprising result that prime and score prices exceed the price of the underlying stock often by a considerable amount using time series data we de monstrate that significant price differentials exist for each firm in our sample

death and taxes the market for flower bonds certain u s government securities known as flower bonds can be redeemed at par plus accrued interest for the purpose of paying estate taxes if held at the time of death thus a flower bond selling at a discount is like a straight bond plus a life insurance policy an equilibrium derived from a rational flower bond pricing model implies the existence of clienteles individuals with the highest death probabilities hold the deepest discount flower bonds the empirical implication that bonds with the deepest discount should be redeemed at the fastest rate is tested and the results support the proposition

optimal stock trading with personal taxes implications for prices and the abnormal january returns abstract the tax law confers upon the investor a timing option to realize capital losses and defer capital gains with the tax rate on long term gains and losses being about half the short term rate the law provides a second timing option to realize losses short term and gains long term if at all our theory and simulation over the 1962 1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term tax trading does not explain the small firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices the january anomaly only if investors are irrational or ignorant of the price seasonality

tax induced intra year patterns in bonds yields the ratio of the yields on short term tax exempt and taxable bonds exhibits a sawtooth pattern that is consistent with the impacts of tax deferments from dates on which interest payments are received to dates on which the resulting tax payments are paid the effect of the tax deferment at turns of calendar years does not differ appreciably from the effect at the turn of any other tax quarter investors with tax payment schedules that differ from that of the investor that is indifferent between investing in taxable and tax exempt bolnds may benefit from tax related timing strategies for investing in these bonds issuers may benefit from tax related timing strategies for scheduling interest payments

evidence on tax motivated securities trading behavior tax loss selling by investors in common stocks near the end of calendar years has been proposed as an explanation for the turn of the year effect in stock returns past analyses of this hypothesis have relied on inferential data we provide here some direct data from a compilation of over 80 000 actual common stock investment round trips by a sample of 3000 individual investors we find strong evidence of a concentration of loss taking trades late in the year and milder evidence of a concentration just prior to the dates when investments become eligible for long term tax treatment the question as to whether and in what manner the impostion of a tax on realized capital gains affects the securities trading behavior of investors who are subject to the tax has been a longstanding topic of research in the financial ecomonics literature the original attention devoted to the matter was motivated primarily by a concern about resource allocation and federal tax revenue consequences and was directed toward the phenomenon of what has been termed the lock in effect of a gains tax that issue has remained an important public policy one and continues today as part of the ongoing debate about appropriate strategies for reducing the federal budget deficit particular additional interest in the topic has emerged in recent years however because securities transactions undertaken systematically for tax reasons have also been proposed as part of the explanation for certain observed anomalies in historical common stock returns most prominently the well documented turn of the year effect our purpose here is to provide some new evidence that decisions by investors as to the timing of the realization of capital gains and losses from their common stock investments are significantly affected by tax considerations this evidence indicates that a difference in the tax rates applicable to realizations classified as short and long term influences the timing of individual investors trades and further that there is a clear tendency for trades by individuals which give rise to losses to be concentrated near the end of calendar which for them are also tax years while we cannot conclude that

optimal consumption and investment with capital gains taxes this article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short sale restrictions the optimal decisions are a function of the investor s age initial portfolio holdings and tax basis our results capture the trade off between the diversification benefits and tax costs of trading over an investor s lifetime the incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor s age contrary to standard financial advice the optimal equity holding increases well into an investor s lifetime in our model due to the forgiveness of capital gains taxes at death taxes play an important role in the decision making process of individuals concerning their consumption and investment plans the taxation of returns on financial assets alters the benefits of saving for future consumption and thus affects the trade off between current consumption and investment moreover the ability of investors to defer the taxation of capital gains alters the relative valuation of stocks and bonds and thus affects the optimal portfolio composition of investors the deferral feature of capital gains taxes also affects the trade off investors face regarding taxes and diversification investors would like to maintain an optimally diversified portfolio over time

short interest explanations and tests cross sectional and time series tests are performed to explain levels and changes in short interest explanatory variables and tests are chosen based on tax arbitrage and speculative reasons for going short short interest is found to follow a seasonal pattern that is weakly consistent with tax based trading stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest which is con sistent with arbitrage efforts for firms with traded options there is a positive association between the month to month changes in option open interest and short interest prior months returns and changes in short interest are positively related but there is no rela tionship between changes in short interest and returns in the subsequent month

securityholder taxes and corporate restructurings previous studies have found that positive abnormal stock returns are associated with corporate spin offs and divestitures using a simplified model of the process of investor tax trading we show that an improvement in the value of the tax timing option component of securities prices is a likely contributing factor to those abnormal returns the analysis indicates that the same phenomenon also may be part of the explanation for the generally higher returns observed for spin offs than for divestitures both when leverage is and is not present in the restructuring transactions

a heterogeneous model of disposition effect a portfolio choice model is provided to illustrate the disposition effect under irrational belief in mean reversion assumption higher cognitive reference stronger irrational belief in mean reversion magnitude and less risk aversion all strengthen the disposition effect in the model the equilibrium market interest rate is priced after the market clearing condition is employed the grater disposition effect reduces the capital mobility from the stock market to the bond market and thus mitigates the dropping of the market interest rate

turn of month evaluations of liquid profits and stock returns a common explanation for the monthly and january effects this paper presents and tests a hypothesis that the standardization of payments in the united states at the turn of each calendar month generally induces a surge in stock returns at the turn of each calendar month the hypothesis also asserts that returns generally will be greater following the month of december and will vary inversely with the stringency of monetary policy empirical results using stock index returns for 19691986 support the hypothesis this analysis provides an explanation for the previously documented monthly effect in stock returns and a partial explanation for the january effect in a recent paper ariel 1987 documents an important empirical regularity in stock returns and terms it the monthly effect using value weighted and equally weighted daily stock index returns for the period 1963 1981 ariel shows that virtually all of the cumulative return on these indexes is realized on ten consecutive trading days of the calendar month beginning with the last trading day of the month and extending through the first nine trading days of the following month ariel considers various explanations for this phenomenon but none sufficed to explain the observed empirical regularity p 174 more recently lakonishok and smidt 1988 examine returns on the dow jones industrial average index for the period 1897 1986 and find that significant mean daily returns are realized consistently on only four consecutive trading days of the calendar month beginning with the last trading day of the month these trading days will henceforth be referred to as the turn of month trading days ariel s and lakonishok and smidt s tests indicate that the monthly effect is not merely another manifestation of the previously documented january effect rozeff and kinney 1976 first documented that average stock index returns in january are higher than in any other month keim 1983 and others find that the surge in january returns is largely confined to stocks of small firms and to the first few trading days in january branch 1977 and others have suggested that the surge in january returns is due to year end tax loss selling and subsequent repurchases in january studies by roll 1983 reinganum 1983 ritter 1988 and others provide evidence consistent with the tax loss selling

dynamic asset pricing effects and incidence of realization based capital gains taxes abstract many analyses of capital gains taxation assume that realization based taxes are economically similar to accrual based taxes in equilibrium however the distinctive implications of realization taxes for asset trading through the lock in effect are associated with distinctive dynamic asset pricing effects asset prices are increased by the current realization tax to partly offset the sale disincentive that the tax would otherwise impose the resulting division of the tax burden between buyers and sellers of assets is similar to traditional public finance models of excise tax incidence in product markets

the optimal trading and pricing of securities with asymmetric capital gains taxes and transaction costs this article explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs in the long term region investors realize all gains below some critical cutoff level which we derive analytically in the short term region investors defer all gains and depending upon the time remaining in the short term region may also defer small losses contrary to common intuition deferral of short term losses can be optimal even without transaction costs the value of tax timing is considerably bigger under the optimal trading strategy than under alternative strategies previously analyzed the impact of offset rules is also explored article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the decline in idiosyncratic values of us treasury securities abstract unique features and market frictions can lead to idiosyncratic pricing for some us treasury securities this study uses a linear programming lp model to measure aggregate idiosyncratic pricing of t notes and t bonds from 1980 to 2016 we document an average idiosyncratic pricing of 0 11 per 100 par as compared to an average bid ask spread of 0 08 further idiosyncratic pricing declined dramatically from the early 1980s to the 2010s empirical evidence suggests that the 1986 tax reform act increasing issue sizes and improving market liquidity contribute to the decline at the individual security level we identify factors contributing to and mitigating idiosyncratic pricing

a reexamination of the value of tax options this article reexamines the value of tax trading when the tax rate on long term realizations is less than that on short term realizations in particular the value of the option to realize long term capital gains and repurchase stock in order to increase one s tax basis and restart the option to realizefuture losses short term is examined empirically our estimate of the incremental value of restarting which is based on the results of simulations of several alternative tax trading policies over a large number of independent return sequences is generally much smaller than that reported by constantinides 1984 the incremental value of restarting is shown to depend critically on the particular pattern of realized returns and the assumed tax treatment of unrealized capital gains at the end of the simulation period the effects of stockprice volatility transaction costs portfolio offset rules and realization cutoff levels on the value of tax trading are also investigated

the brain as a hierarchical organization based on recent neuroscience evidence we model the brain as a dual system organization subject to three conflicts asymmetric information temporal hori zon and incentive salience under the first and second conflicts we show that the uninformed system imposes a positive link between consumption and labor at every period furthermore decreasing impatience endogenously emerges as a consequence of these two conflicts under the first and third conflicts it becomes optimal to set a consumption cap finally we discuss the behavioral implications of these rules for choice bracketing and expense tracking and for consumption over the life cycle jel dil d74 d82 d87 d91

volume for winners and losers taxation and other motives for stock trading capital gains taxes create incentives to trade our major finding is that turnover is higher for winners stocks the prices of which have increased than for losers which is not consistent with the tax prediction however the turnover in december and january is evidence of tax motivated trading there is a relatively high turnover for losers in december and for winners in january we conclude that taxes influence turnover but other motives for trading are more important we were unable to find evidence that changing the length of the holding period required to qualify for long term capital gains treatment affected turnover investors responding to the tax incentives in the capital gains laws should produce predictable patterns in the volume of trading in a stock but not necessarily in its price this study uses past price patterns as a proxy to measure the incentives to sell or avoid selling a stock and observes trading volumes to estimate the extent to which investors respond to these incentives past price patterns may influence trading volumes for other non tax related reasons as well these are also considered we find that past prices influence current incentives to trade through both tax and non tax motives winners tend to have higher abnormal volumes than losers this would be expected if non tax related motives were predominant however the influence of tax related motives on trading volume is shown by seasonal variations in the relationship between past price changes and turnover as predicted by tax induced trading theories the volume of losers is higher than normal in december and the volume of winners is higher than normal in january we found no evidence that trading volume was affected by changes in the length of the holding period required to qualify for long term capital gains investors reactions to capital gains taxes are important for several reasons first a comprehensive understanding of investor behavior would include both price and volume understanding the relationship between taxes and volume is a fruitful and convenient method of contributing to this subject the resource allocation consequences of capital gains taxes are controversial in part because

tax loss selling and the january effect evidence from municipal bond closed end funds 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 among the numerous stock return anomalies probably none has generated more interest than that of the turn of the year or january effect the phenomenon in which small capitalization stocks realize unusually high returns in early january 1 the literature offers a number of hypotheses to explain this phenomenon including the tax loss selling hypothesis the window dressing hypothesis the insider trading information release hypothesis and the seasonality of the risk return relation hypothesis given existing evidence in some support for the first two hypotheses the debate continues with respect to which of these the tax loss selling of individual investors or the window dressing of

the market reaction to stock splits in this paper a model of market reaction to stock splits is presented and tested we argue that the announcement of a split sets off the following chain of events the market recognizes that subsequent to the reverse split ex day the daily number of transactions along with the raw volume of shares traded will increase decrease this increase in volume results in an increase in the noisiness of the security s return process the increase in noise raises the tax option value of the stock and it is this value that generates the announcement effect of stock splits empirical evidence using security returns daily trading volume and shareholder data strongly supports this theory the evidence in conjunction with this theory also agrees with extant literature that splits result in decreased liquidity but there is no evidence that this reduction in liquidity is priced stock splits have presented finance theorists with a conundrum these nonevents seem to be a purely cosmetic change nevertheless research shows that significant price reaction is attributable directly to splits recently grinblatt masulis and titman 12 show that even in clean cases i e where no other firm specific event coincides with a split announcement stock splits generate a positive abnormal return of close to three percent upon announcement and an additional one percent abnormal return on the ex day the primary contribution of this paper is to provide and empirically support a rational explanation for the split reverse split announcement effect a recent study by ohlson and penman 16 documents a statistical aberration that stock volatilities increase by an average of thirty five percent subsequent to split ex days in this paper we provide a direct statistical extension of ohlson and penman in three directions first we examine reverse splits and demonstrate that they exhibit reductions in volatility second we isolate the shift in volatility as between the nonsystematic and systematic components finally we establish a link between trading volume and the increased volatility copeland 9 shows that contrary to market folklore the liquidity of a stock is actually reduced by a split we provide a statistical extension to copeland by examining the volume pattern of reverse splits copeland observes a drop in split adjusted volume and concludes that liquidity has declined once again we show that the behavior of stocks that reverse split is opposite that of splitting stocks

online low price guarantees a real options analysis a common practice among large retailers is the low price guarantee rebating consumers if they find an identical product cheaper elsewhere this provides consumers with some level of comfort in their purchase decision a similar low price guarantee is provided by numerous service industries that allow reservation of capacity yet do not penalize the consumer for failure to keep that reservation examples include hotels and car rental given that a consumer is not required to keep the reservation they may make another reservation either at a competing firm or the same firm if future prices decline the increasing availability of pricing information on the internet affords consumers the opportunity to be more strategic in their purchasing behavior as consumers we are able to quickly and easily check prices from numerous service or goods providers the ease of price information potentially makes these guarantees very costly to the service or good provider we analyze the implied costs associated with these guarantees by making analogies to financial options motivation for this research comes from a large car rental firm dollar thrifty automotive group inc that considered offering a low price guarantee to all consumers that book a reservation though their website

trading volume for winners and losers on the tokyo stock exchange this paper examines trading volume on the tokyo stock exchange traditional theory suggests that taxes create strong incentives to delay realization of capital gains and accelerate realization of losses contrary to the theory we find strong evidence that turnover is higher for stocks with gains winners than for stocks with losses losers in particular the winner stocks of keiretsu firms tend to have high end of fiscal year turnover this is true even when realizing gains could result in higher tax liabilities we conclude that capital gains taxes have only a small impact on turnover in japan other non tax related motives especially window dressing appear to dominate investor behavior we find strong evidence that this window dressing is concentrated in the stock of keiretsu firms

beta changes around stock splits revisited recent papers by lamoureux and poon 1987 and brennan and copeland 1988 document a significant permanent increase in average beta subsequent to stock split ex dates this paper demonstrates that the shift in estimated beta following ex dates decays as the measurement interval is lengthened there is no statistically significant difference between pre and post split betas using the scholes williams 1977 estimator and weekly return data or using monthly returns we conclude that lamoureux and poon s and brennan and copeland s results can be attributed to a bias created by using too short a return measurement interval to estimate beta

are professional traders too slow to realize their losses data on a u s proprietary stock trading team provide evidence of the tendency of traders to hold on to their losers too long and sell their winners too soon that is the disposition effect the group of traders studied earned more than 1 4 million in intraday trading profits but they realized their winning trades at a much faster rate than their losing trades this tendency lowered their profitability when the traders limited their risk exposure by trading in small share sizes in low priced stocks or during periods of low volatility the discrepancy between losing and winning holding times rose an analysis of intraday prices suggests that traders could increase trading profits by holding winners longer and selling losers sooner

institutions and individuals at the turn of the year this article evaluates the tax loss selling hypothesis against the window dressing hypothesis as explanations for turn of the year anomalies we examine differences between securities dominated by individual investors versus those dominated by institutional investors and find that the effect is more pervasive in the former controlling for capitalization we find that in early january late december stocks with greater individual investor interest outperform underperform stocks with greater institutional investor interest these results hold for both stocks that previously appreciated in value and stocks that previously depreciated in value the results are most consistent with the tax loss selling hypothesis as an explanation for the turn of the year effect

long term and short term price memory in the stock market abstract in this study we examine the issue of memory in common stock returns through an analysis of short and long term dependencies in various equity return series we conclude that there is no compelling evidence that would support a finding of systematic dependencies in the behavior of equity returns

calendar anomalies abnormal returns at calendar turning points 1988 calendar anomalies abnormal returns at calendar turning points financial analysts journal vol 44 no 6 pp 28 39

volume and turn of the year behavior abstract this paper studies the trading characteristics of listed companies by size and year end behavior there were no transactions on nearly 25 of the days for the smallest decile even at the turn of year which is an active trading period for small companies as a result of low levels of trading and the regulations governing exchange specialists transaction prices and quotations of small listed companies may require several days to fully reflect equilibrium price changes the data confirm the existence of a year end seasonal pattern in rates of return for small companies and suggest that there may be a seasonal pattern for large companies as well

tax exempt investors and the asset allocation puzzle abstract investors frequently hold equity in pensions and other tax exempt savings plans despite the prediction of the standard model that they hold only bonds we provide a new explanation for this empirical puzzle based on differences between tax exempt and taxable assets in the tax treatment of capital losses we show how limits on refundability of losses on taxable equities leads to diversity of investors preferences for corporate leverage on the basis of tax rates in the simplest equilibrium of the model tax exempt savers hold risky highly levered equities while low bracket taxable savers hold bonds and high bracket taxpayers hold relatively safe unlevered equities we discuss the implications of tax exempts for risk taking and agency costs within the firm

path dependent options the case of lookback options lookback options are path dependent contingent claims whose payoffs depend on the extrema of a given security s price over a certain period of time using probabilistic tools we derive explicit formulas for various european lookback options and provide some results about their american counterparts

endowment effects in the field evidence from india s ipo lotteries we study a unique field experiment in india in which 1 5 million stock investors face lotteries for the random allocation of shares we find that the winners of these randomly assigned initial public offering ipo lottery shares are significantly more likely to hold them than lottery losers 1 6 and even 24 months after the random allocation this finding strongly evokes laboratory findings of an endowment effect for risky gambles and persists in samples of highly active investors suggesting along with additional evidence that this behaviour is not driven by inertia alone the effect decreases as experience in the ipo market increases but remains even for very experienced investors leading theories of the endowment effect based on reference dependent preferences are unable to fully explain these and other findings in the data