Skip to main content

Research Repository

Advanced Search

Long-term return reversals-Value and growth or tax? UK evidence

Wu, Yuliang; Li, Youwei

Authors

Yuliang Wu



Abstract

This paper examines (i) whether value-growth characteristics have more power than past performance in predicting return reversals; and (ii) whether typical rational behaviour such as incentives to delay paying capital gain taxes can better explain long-term reversals than past performance. We find that value-growth characteristics generally provide better explanations for long-term stock returns than past performance. The evidence also shows that winners identified by capital gains dominate past performance winners in predicting reversals in the cross-sectional comparison. However, in the time-series analysis, when returns on capital gain winners are adjusted by the Fama and French (1996) risk factors, the predictive power of capital gain winners disappears. Our results show that capital gain winners are heavily featured as growth stocks. Return reversals in capital gain winners potentially reflect market price corrections for growth stocks. We conclude that investors’ incentives to delay paying capital gain taxes cannot fully rationalise long-term reversals in the UK market. Our results also imply that the long-term return pattern potentially reflects a mixture of investor rational and irrational behaviour.

Citation

Wu, Y., & Li, Y. (2011). Long-term return reversals-Value and growth or tax? UK evidence. Journal of International Financial Markets, Institutions and Money, 21(3), 347-368. https://doi.org/10.1016/j.intfin.2010.12.001

Journal Article Type Article
Acceptance Date Dec 9, 2010
Online Publication Date Dec 16, 2010
Publication Date 2011-07
Deposit Date Mar 19, 2019
Publicly Available Date Mar 29, 2024
Journal Journal of International Financial Markets, Institutions and Money
Print ISSN 1042-4431
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 21
Issue 3
Pages 347-368
DOI https://doi.org/10.1016/j.intfin.2010.12.001
Keywords Long-term reversals; Overreaction; Taxes; UK stock market
Public URL https://hull-repository.worktribe.com/output/1113341
Publisher URL https://www.sciencedirect.com/science/article/pii/S1042443110000958?via%3Dihub

Files





You might also like



Downloadable Citations