A November Effect? Revisiting the Tax-Loss-Selling Hypothesis

We document the existence of another seasonality in stock returns: a November effect. The uniqueness of this study is that the November effect is observed only after the passage of the Tax Reform Act of 1986. We document a unique and significant relationship between excess returns and the potential...

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Bibliographic Details
Published in:Financial management 1999, Vol.28 (4), p.5-15
Main Authors: Bhabra, Harjeet S., Dhillon, Upinder S., Ramírez, Gabriel G.
Format: Article
Language:English
Subjects:
Accounting
Capital gains
Coefficients
Corporations
Estimated taxes
Finance
Financial economics
Financial portfolios
Hypotheses
Income taxes
Investors
Methods
Mutual funds
Portfolio management
Rates of return
Seasonal variations
Seasonal variations (Economics)
Seasons
Stock exchanges
Stock prices
Stock sales
Stocks
Studies
Tax rates
Tax reform
Tax Reform Act 1986-US
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Summary:We document the existence of another seasonality in stock returns: a November effect. The uniqueness of this study is that the November effect is observed only after the passage of the Tax Reform Act of 1986. We document a unique and significant relationship between excess returns and the potential for tax-loss selling and conclude that the November effect is explained by the tax-loss-selling hypothesis. We also show that the January effect in the post-Act period is stronger than in the pre-Act period. This result is likely due to the Act's elimination of the preferential treatment for capital gains. The evidence presented in this paper suggests that tax-loss selling is a dominant explanation for the seasonality of stock returns.
ISSN:0046-3892
1755-053X
DOI:10.2307/3666300