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, of for other types of
institutions either befor 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 resuts suggest that funds were able to
mitigate potential price pressures by having the
foresight to spread tax-motivated sales over
relatively long time horizons.