Stockholders’ Unrealized Capital Gains Position and the Market Response to Earnings Announcements

Stockholders’ Unrealized Capital Gains Position and the Market Response to Earnings Announcements

Eric Weisbrod 

University of Miami – Department of Accounting
February 4, 2013

I examine whether stockholders’ average unrealized capital gains position in the equity of a given firm affects their response to the firm’s quarterly earnings announcements. Stockholders’ unrealized capital gains can affect their individual trading decisions via the capital gains tax “lock-in effect” or the tax-irrational bias known as the “disposition effect.” Prior literature is unclear about whether these two effects are significant determinants of the market reaction to earnings news. I design new tests that incorporate trade-by-trade data as well as quarterly institutional holdings data, and find robust evidence supporting the disposition effect. However, I also find that this announcement-window disposition effect is mitigated when tax incentives are stronger or more salient. Finally, I demonstrate that the disposition effect has important implications for measuring the degree to which the market incorporates earnings news. First, the disposition effect moderates the degree to which both opinion divergence and the differential precision of pre-announcement earnings information are reflected in abnormal trading volume. Second, the disposition effect diminishes the price adjustment to earnings news during the announcement window.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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