Tax-Motivated Trading and Price Pressure:An Analysis of Mutual Fund Holdings

Abstract

The 1986 Tax Reform Act (TRA) replaced non-synchronoustax year-ends with a common October 31 year-end forall mutual funds. After the TRA, we find that fundssystematically accelerated the sale of losers priorto October 31. A similar pattern is not present forfunds before the TRA, of for other types ofinstitutions either befor or after the TRA.Examining stock returns in the first year the newTRA regulations became fully effective, we findevidence of a strong “November effect” for priorlosers in which funds collectively had largeholdings. Interestingly, fund managers appear tohave learned from this experience. In subsequentyears, our resuts suggest that funds were able tomitigate potential price pressures by having theforesight to spread tax-motivated sales overrelatively long time horizons.