Journal of Accounting and Economics Vol. 57 No. 1 2014
The turn-of-the-year effect and tax-loss-selling by institutional investors
Abstract
Prior studies attribute the turn-of-the-year effect whereby small capitalization stocks earn unusually high returns in early January to tax-loss-selling by individual investors and window-dressing by institutional investors. My results suggest that a significant portion of the effect on turn-of-the-year returns that prior studies attribute to window-dressing is actually attributable to tax-loss-selling by institutional investors. Among small capitalization stocks, I find that institutional investors with strong tax incentives and weak window-dressing incentives realize significantly more losses in the fourth quarter than in the first three quarters of the calendar year, and that their fourth quarter realized losses have a significant impact on turn-of-the-year returns. A one percentage point change in these institutional investors' fourth quarter realized losses scaled by a firm's market capitalization results in an increase of 47 basis points in the firm's average daily return over the first three trading days of January, which represents a 46 percent change for the mean firm.
- DOI
- 10.1016/j.jacceco.2013.12.002
- Volume
- 57
- Issue
- 1
- Pages
- 22-42
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref