Douglas A. Shackelford (University of North Carolina-Chapel Hill, Kenan Flagler Business School) presents Capital Gains Taxes and the Return-Risk Tradeoff (with Zhonglan Dai (University of Texas-Dallas, School of Management) & Harold H. Zhang (University of Texas-Dallas, School of Management)) at NYU today as part of its Colloquium Series on Tax Policy and Public Finance. The co-convenors of the colloquium are Daniel Shaviro (NYU) & Mihir Desai (Harvard Business School).  Here is the abstract:

We derive cross-sectional implications of a capital gains tax rate change on the risk-return tradeoff on stock investment and show that stocks with higher accrued capital gains experience a larger risk-return tradeoff improvement after a capital gains tax rate cut. Stocks with higher dividend yields experience a larger increase (decrease) in the risk-return tradeoff when the dividend tax penalty effect dominates (is dominated by) the effect of reduced dividend yield associated with the capital gains tax cut. Studying both the Tax Relief Act of 1997 and the Revenue Act of 1978, we find stocks with higher accrued capital gains experienced larger increases in the expected return, the systematic risk, and the risk-return tradeoff after the capital gains tax cut. Stocks with higher dividend yields experienced larger decreases in the risk-return tradeoff, suggesting that the reduction in dividend yield associated with the capital gains tax cut may have dominated the dividend tax penalty effect.