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

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Abstract
The 1986 Tax Reform Act (TRA) replaced non-synchronous tax year-ends with a common October 31 year-end for all mutual funds. After the TRA, we find that funds systematically accelerated the sale of losers prior to October 31. A similar pattern is not present for funds before the TRA, or for other types of institutions either before or after the TRA. Examining stock returns in the first year the new TRA regulations became fully effective, we find evidence of a strong "November effect" for prior losers in which funds collectively had large holdings. Interestingly, fund managers appear to have learned from this experience. In subsequent years, our results suggest that funds were able to mitigate potential price pressures by having the foresight to spread tax-motivated sales over relatively long time horizons.

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