The Trading Stock Valuation Adjustment and Economic Rents to Shareholders

In August 1976 the then Federal Treasurer foreshadowed the incorporation in the Income Tax Assessment Act, 1936 of a severely modified form of the Mathews Committee's (1975) recommendations on trading stock. This paper documents the existence of substantial “tax-free†capital gains to those invested in the equity of affected companies, in particular retailer-merchants, at the time of this announcement. The observed price response was immediate and consistent with subsequent realizations of the “trading stock valuation adjustment†– both of which would be expected if capital markets are efficient.