Capital Gains Taxes and Expected Rates of Return | The Accounting ... [PDF]
The behavior of expected pre-tax returns is nuanced because an increase in a capital gains tax rate has two chief implications. First, an increase in a .... (2010a), which shows that stock return volatility increased following both RA78 and TRA97. Because an equilibrium .... are not subject to tax. Finally, solving for Pj gives: ...
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You have requested the following content: The Accounting Review May 2012, Vol. 87, No. 3, pp. 1067-1086
Capital Gains Taxes and Expected Rates of Return Stephanie A. Sikes and Robert E. Verrecchia https://doi.org/10.2308/accr-50129
OTHER ARTICLES ABSTRACT: Prior literature predicts a positive relation between firms' expected pre-tax rates of return and investor-level capital gains tax rates. We show that this relation is more nuanced than suggested by prior literature and that in three circumstances the relation can actually be negative. The first circumstance is when a firm's systematic risk is very high. The second circumstance is when the market risk premium is very high. The third circumstance is when the risk-free rate of return is very low. The circumstances arise because, in addition to reducing investors' expected after-tax cash proceeds, capital gains taxes reduce the risk that investors associate with the expected after-tax cash proceeds. Keywords: taxes, asset pricing, expected return Received: September 2010; Accepted: December 2011; Published: January 2012
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