Tax-loss Selling and the Turn-of-the-Year Effect

Abstract

This paper examines the turn-of-the-year effect in Norway during 1984 and 1999, focusing on testing the tax-loss selling hypothesis. Using an interesting dataset that contains variations in a few tax codes, we find significant evidences that are largely supportive of the tax-related explanation for the turn-of-the-year effect. We find that the market-adjusted return over the turn of the year is strongly positively related to the size of previous capital loss, the tax rate and the interest rate; and it is significantly negatively related to the limitations on the capital loss write-offs, the length of the holding period during which the capital loss is tax-deductible, the size of the listed firm. However, similar to previous studies, we find that tax-loss selling cannot single-handedly explain for the whole turn-of-the-year anomaly, especially the large positive returns of the small winner stocks.