On the Role of Intangible Information and Capital Gains Taxes in Long-Term Return Reversals

Abstract

Prior studies have linked long-term reversals to the magnitude of locked-in capital gains, suggesting that reversals are driven by tax effects and not overreaction. We show that locked-in capital gains do not explain the reversals in winners when winner returns are based intangible information (Daniel and Titman, 2006). In fact, the reversals for intangible return winners are long-lasting and robust to controls for growth in assets and capital expenditures. To the extent that reversals associated with intangible information stem from investors’ overreaction to intangible information, and given prior results linking reversals only to intangible information, our results suggest that overreaction still explains reversal patterns in US stock returns.