[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 higher under the optimal trading strategy than under alternative strategies previously analyzed. The impact of offset rules is also explored.]

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 higher under the optimal trading strategy than under alternative strategies previously analyzed. The impact of offset rules is also explored.

This article derives testable restrictions on equilibrium asset prices when investors have the option to time the realization of their capital gains and losses for tax purposes. The tax-timing option alters both the magnitude and timing of equity returns relative to those in a tax-free model. The tax-induced restrictions are empirically examined, and the tax rates and preference parameters are estimated. While the tax-free model can be rejected in favor of the tax-based model as the specified alternative, the tax-based model is still unable to adequately explain cross-sectional differences in asset returns.

Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.

Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly-issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.

Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly‐issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.

This paper provides an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty. It extends the DeAngelo and Masulis capital structure model by endogenizing the firm's investment decision. The authors' results indicate that, when investment is allowed to adjust optimally, the existing predictions about the relationship between investment-related and debt-related tax shields must be modified. In particular, the authors show that increases in investment-related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level. In cross-sectional analysis, firms with higher investment-related tax shields (normalized by expected earnings) need not have lower debt-related tax shields (normalized by expected earnings) unless all firms utilize the same production technology. Differences in production technologies across firms may thus explain why the empirical results of recent cross-sectional studies have not conformed to the predictions of DeAngelo and Masulis.

This paper provides an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty. It extends the DeAngelo and Masulis capital structure model by endogenizing the firm's investment decision. The authors' results indicate that, when investment is allowed to adjust optimally, the existing predictions about the relationship between investment‐related and debt‐related tax shields must be modified. In particular, the authors show that increases in investment‐related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level. In cross‐sectional analysis, firms with higher investment‐related tax shields (normalized by expected earnings) need not have lower debt‐related tax shields (normalized by expected earnings) unless all firms utilize the same production technology. Differences in production technologies across firms may thus explain why the empirical results of recent cross‐sectional studies have not conformed to the predictions of DeAngelo and Masulis.

In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or “tax arbitrage.” This paper characterizes the joint restrictions on financial‐asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short‐sale constraints. The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then “no‐tax‐arbitrage” prices will exist. They also show that the existence of “no‐tax‐arbitrage” prices ensures the existence of equilibrium prices.

In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or "tax arbitrage."This paper characterizes the joint restrictions on financial-asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short-sale constraints.The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then "no-tax-arbitrage" prices will exist.They also show that the existence of "no-tax-arbitrage" prices ensures the existence of equilibrium prices. THE EFFECTS OF DIFFERENTIAL taxation on the equilibrium prices of financial assets have attracted much attention from financial economists in recent years.Otherwise identical securities that contribute to taxable income to different degrees will, in general, be valued differently by taxable investors.As a result, tax considerations have been useful in helping explain the effect of dividend yield on stock returns,' the effect of coupon levels and term to maturity on bond prices,2 the timing of investors' portfolio transactions,3 and the observed capital structures of firms.4While a rich set of observed behaviors can be better understood by reference to differential taxation, there are well-known difflculties in dealing with taxes in a general-equilibrium setting.To clear markets, relative prices must reflect the marginal rates of substitution of all agents simultaneously.When tax rates differ across investors, however, this condition can be impossible to achieve.To illustrate, consider a world of perfect certainty with two assets: a tax-exempt municipal bond and a taxable government bond.To equate marginal rates of substitution, the rate of return on the government bond, rg, must equal that on the municipal, rm, "grossed up" by one minus the investor's marginal tax rate, ti; that is, rg = rm/( 1 -ti).If there are investors in more than one tax bracket, this condition will obviously be impossible to satisfy for all of them simultaneously.