The Impact of Capital Gains Taxes on Stock Price Reactions to S&P 500 Inclusion

Capital gains tax rates vary with the length of time that individuals hold property. This paper investigates whether these holding period incentives to defer (accelerate) the sale of appreciated (depreciated) property affect the prices of securities entering the Standard amp; Poor's 500 Stock Index. Examining additions from 1978-1999, we find that on the first trading day following announcement, abnormal stock returns are increasing in the difference between short-term and long-term capital gains tax treatment. We infer that stock price adjustments shift individual investors' tax burdens to acquiring index funds. Consistent with temporary price pressure, the price reaction largely unwinds subsequently