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1、Capital Gains Taxes and the Reward-to-Risk Ratio Capital Gains Taxes and the Reward-to-Risk Ratio Zhonglan Dai University of Texas at Dallas Douglas A. Shackelford University of North Carolina and NBER Harold H. Zhang University of Texas at Dallas June 2010 We thank David Mauer, Michael Rebello, Val
2、ery Polkovnichenko, Yexiao Xu, and seminar participants at Fudan University, Huazhong University of Science and Technology, and the University of Texas at Dallas for helpful comments. Zhonglan Dai is at the School of Management, University of Texas at Dallas, Richardson, TX 75083, zdaiutdallas.edu,
3、Douglas A. Shackelford is at the Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC 27599, Douglas_Shackelfordkenan-flagler.unc.edu, and Harold H. Zhang is at the School of Management, University of Texas at Dallas, Richardson, TX 75083, harold.zhangutdallas.edu. All errors
4、 are our own. Capital Gains Taxes and the Reward-to-Risk Ratio Abstract We demonstrate that the reward-to-risk ratio varies across stocks with different sensitivity to capital gains taxes. This is in contrast to the prediction of identical reward-to-risk ratio across all assets by standard asset pri
5、cing models. Focusing on cross-sectional implications of a capital gains tax rate change on the reward-to-risk on stocks, we show that stocks with higher accrued capital gains experience larger reward-to-risk ratio increases after a capital gains tax rate cut. Stocks with higher dividend yields expe
6、rience a larger increase (decrease) in the reward-to-risk ratio when the dividend tax penalty effect dominates (is dominated by) the opposing effect due to capital gains tax rate cut. Studying both the Revenue Act of 1978 and the Tax Relief Act of 1997, we find stocks with higher accrued capital gai
7、ns and losses experienced larger increases in the reward-to-risk ratio after the capital gains tax cut. Stocks with higher dividend yields experienced larger decreases in the reward-to-risk ratio, suggesting that the dividend tax penalty effect is dominated by the opposing effect due to capital gain
8、s tax rate reduction. 1 1. Introduction This paper examines the effect of capital gains taxes on the reward-to-risk of stock investments measured by the ratio of the expected excess return to the systematic risk on a cross section of stocks. As the foundation of modern capital asset pricing theory,
9、the reward-to-risk, a measure of the Sharpe ratio, plays a key role in investors financial decisions because rational investors form their investment portfolios to achieve the optimal risk and return tradeoff. Existing literature about the asset pricing effect of the capital gains taxation have prim
10、arily focused on the level of asset returns without explicitly making the connection 1to the risk and return tradeoff. In the meantime, extant studies on the reward-to-risk ratio in 2the asset pricing literature do not explicitly consider the impact of capital gains taxes. Our study fills this void
11、in the literature by investigating the effects of capital gains taxation on the tradeoff between the expected return and the systematic risk or the reward-to-risk. Our analysis offers new perspectives concerning capital gains taxes and the asset pricing relation, proposes an alternative approach to
12、more effectively test the impact of taxes on asset returns, and points to a new direction for evaluating the efficacy of government tax policy. Standard asset pricing models such as Sharpe (1964) and Lintner (1965) assume no taxation on capital income (dividends and capital gains). These models impl
13、y that the reward-to-risk ratio measured by the ratio of the expected excess return to the systematic risk should be constant over time and across risky assets. Extensions to allow for the information flow to influence expected excess return and volatility lead to conditional versions of these model
14、s 1 Empirical research on the effects of capital gains taxes on asset prices has concentrated on the level of stock returns and produced conflicting results. For instance, Collins and Kemsley (2000), Lang and Shackelford (2000), Ayers, Lefanowics, and Robinson (2003), among others, report that capit
15、al gains taxes reduce stock return, while Landsman and Shackelford (1995), Reese (1998), Poterba and Weisbenner (2001), Blouin, Raedy, and Shackelford (2003), Jin (2006), among others, document that capital gains taxes increase stock return. By jointly considering the impact from capital gains taxes
16、 on both demand and supply of assets, Dai, Maydew, Shackelford, and Zhang (2008) show that stocks returns are higher in anticipation of a tax cut and lower after a capital gains tax rate cut became effective. 2 Campbell (1987), French, Schwert, and Stambaugh (1987), Harvey (1989, 1991), and Kandel and Stambaugh (1989), Ludvigson and Ng (2007), among others,
