The Impact of the Short-Short Rule Repeal on the Timing Ability of Mutual Funds
: Existing empirical studies find little evidence that mutual fund managers time the market. Repealed in 1997, Internal Revenue Service Code Section 851 (b)(3), known as the ‘short‐short rule,’ requires that mutual funds derive less than 30 percent of their gross income from the sale of securities...
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Veröffentlicht in: | Journal of business finance & accounting 2008-09, Vol.35 (7-8), p.969-997 |
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description | : Existing empirical studies find little evidence that mutual fund managers time the market. Repealed in 1997, Internal Revenue Service Code Section 851 (b)(3), known as the ‘short‐short rule,’ requires that mutual funds derive less than 30 percent of their gross income from the sale of securities held for less than three months. Failing to comply with the rule means that the Internal Revenue Service taxes the fund's entire gain at the 35 percent corporate tax rate. The short‐short rule likely hinders mutual fund managers from timing the market, as it constrains hedging and trading strategies involving short‐term trades. In this paper we exploit the natural experiment arising from the repeal of the tax regulation. We find that the timing performance of mutual fund managers improves significantly after the short‐short rule repeal. This result suggests that the perverse timing ability documented in the previous literature is partly due to the tax regulation imposed on mutual funds. |
doi_str_mv | 10.1111/j.1468-5957.2008.02097.x |
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Repealed in 1997, Internal Revenue Service Code Section 851 (b)(3), known as the ‘short‐short rule,’ requires that mutual funds derive less than 30 percent of their gross income from the sale of securities held for less than three months. Failing to comply with the rule means that the Internal Revenue Service taxes the fund's entire gain at the 35 percent corporate tax rate. The short‐short rule likely hinders mutual fund managers from timing the market, as it constrains hedging and trading strategies involving short‐term trades. In this paper we exploit the natural experiment arising from the repeal of the tax regulation. We find that the timing performance of mutual fund managers improves significantly after the short‐short rule repeal. This result suggests that the perverse timing ability documented in the previous literature is partly due to the tax regulation imposed on mutual funds.</description><identifier>ISSN: 0306-686X</identifier><identifier>EISSN: 1468-5957</identifier><identifier>DOI: 10.1111/j.1468-5957.2008.02097.x</identifier><language>eng</language><publisher>Oxford, UK: Blackwell Publishing Ltd</publisher><subject>Accounting ; Business management ; Business studies ; Corporate taxation ; Finance ; Financial regulation ; Hedging ; Impact analysis ; Investment advisors ; Investment trusts ; Market analysis ; Market timing ; Mutual funds ; Scandals ; Securities trading ; short-short rule ; Studies ; Tax rates ; Tax regulations</subject><ispartof>Journal of business finance & accounting, 2008-09, Vol.35 (7-8), p.969-997</ispartof><rights>2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd</rights><rights>Copyright Blackwell Publishing Ltd. 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Repealed in 1997, Internal Revenue Service Code Section 851 (b)(3), known as the ‘short‐short rule,’ requires that mutual funds derive less than 30 percent of their gross income from the sale of securities held for less than three months. Failing to comply with the rule means that the Internal Revenue Service taxes the fund's entire gain at the 35 percent corporate tax rate. The short‐short rule likely hinders mutual fund managers from timing the market, as it constrains hedging and trading strategies involving short‐term trades. In this paper we exploit the natural experiment arising from the repeal of the tax regulation. We find that the timing performance of mutual fund managers improves significantly after the short‐short rule repeal. This result suggests that the perverse timing ability documented in the previous literature is partly due to the tax regulation imposed on mutual funds.</description><subject>Accounting</subject><subject>Business management</subject><subject>Business studies</subject><subject>Corporate taxation</subject><subject>Finance</subject><subject>Financial regulation</subject><subject>Hedging</subject><subject>Impact analysis</subject><subject>Investment advisors</subject><subject>Investment trusts</subject><subject>Market analysis</subject><subject>Market timing</subject><subject>Mutual funds</subject><subject>Scandals</subject><subject>Securities trading</subject><subject>short-short rule</subject><subject>Studies</subject><subject>Tax rates</subject><subject>Tax regulations</subject><issn>0306-686X</issn><issn>1468-5957</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2008</creationdate><recordtype>article</recordtype><sourceid>X2L</sourceid><recordid>eNqNkE2P0zAQhiMEEmXhP0QcuKWM7diOL0hl2S67tFRaysdt5DgOTcgXcQLtv8dpUA-csDRjW_O-j0ZvEIQElsSf1-WSxCKJuOJySQGSJVBQcnl8FCwug8fBAhiISCTi29PgmXMlAFAi5CLY7Q82vKs7bYawzcPB_z4d2n6Izj18GCsbPtjO6ipsm_N4X9RF8z1cpUVVDKfJtB2H0c_XY5O558GTXFfOvvh7XwWf1zf76_fRZnd7d73aRIbHsYwoFTTTsZF5bgy1TEtpqKYkIamQWhklJRFci4QBEEg4VzGVNsuAZ5KolLOr4NXM7fr252jdgHXhjK0q3dh2dMgk4QByEr78R1i2Y9_43ZAyCUxwknhRMotM3zrX2xy7vqh1f0ICOMWMJU5p4pQmTjHjOWY8eututvY-JXPxpZUu07zRBn8h04z7dvI1W5V_Fb4kJr53vpRQqDzvMNSe-GYm_i4qe_rvTfD-7Xo1PT0gmgGFG-zxAtD9DxSSSY5fP97i-gO8u99st_iF_QFlrKq6</recordid><startdate>200809</startdate><enddate>200809</enddate><creator>Bae, Kee-Hong</creator><creator>Yi, Junesuh</creator><general>Blackwell Publishing Ltd</general><general>Wiley Blackwell</general><scope>BSCLL</scope><scope>DKI</scope><scope>X2L</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>200809</creationdate><title>The Impact of the Short-Short Rule Repeal on the Timing Ability of Mutual Funds</title><author>Bae, Kee-Hong ; Yi, Junesuh</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c5447-2262da4c7ffcc2e3a77c2a2181b67a9c977165a68300108559427edd05d719b53</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2008</creationdate><topic>Accounting</topic><topic>Business management</topic><topic>Business studies</topic><topic>Corporate taxation</topic><topic>Finance</topic><topic>Financial regulation</topic><topic>Hedging</topic><topic>Impact analysis</topic><topic>Investment advisors</topic><topic>Investment trusts</topic><topic>Market analysis</topic><topic>Market timing</topic><topic>Mutual funds</topic><topic>Scandals</topic><topic>Securities trading</topic><topic>short-short rule</topic><topic>Studies</topic><topic>Tax rates</topic><topic>Tax regulations</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Bae, Kee-Hong</creatorcontrib><creatorcontrib>Yi, Junesuh</creatorcontrib><collection>Istex</collection><collection>RePEc IDEAS</collection><collection>RePEc</collection><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>Journal of business finance & accounting</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Bae, Kee-Hong</au><au>Yi, Junesuh</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>The Impact of the Short-Short Rule Repeal on the Timing Ability of Mutual Funds</atitle><jtitle>Journal of business finance & accounting</jtitle><date>2008-09</date><risdate>2008</risdate><volume>35</volume><issue>7-8</issue><spage>969</spage><epage>997</epage><pages>969-997</pages><issn>0306-686X</issn><eissn>1468-5957</eissn><abstract>: Existing empirical studies find little evidence that mutual fund managers time the market. Repealed in 1997, Internal Revenue Service Code Section 851 (b)(3), known as the ‘short‐short rule,’ requires that mutual funds derive less than 30 percent of their gross income from the sale of securities held for less than three months. Failing to comply with the rule means that the Internal Revenue Service taxes the fund's entire gain at the 35 percent corporate tax rate. The short‐short rule likely hinders mutual fund managers from timing the market, as it constrains hedging and trading strategies involving short‐term trades. In this paper we exploit the natural experiment arising from the repeal of the tax regulation. We find that the timing performance of mutual fund managers improves significantly after the short‐short rule repeal. This result suggests that the perverse timing ability documented in the previous literature is partly due to the tax regulation imposed on mutual funds.</abstract><cop>Oxford, UK</cop><pub>Blackwell Publishing Ltd</pub><doi>10.1111/j.1468-5957.2008.02097.x</doi><tpages>29</tpages></addata></record> |
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source | RePEc; Wiley Online Library Journals Frontfile Complete; Business Source Complete |
subjects | Accounting Business management Business studies Corporate taxation Finance Financial regulation Hedging Impact analysis Investment advisors Investment trusts Market analysis Market timing Mutual funds Scandals Securities trading short-short rule Studies Tax rates Tax regulations |
title | The Impact of the Short-Short Rule Repeal on the Timing Ability of Mutual Funds |
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