THE CAPITAL GAIN LOCK-IN EFFECT WITH SHORT SALES CONSTRAINTS

This paper develops a post-tax asset pricing model under the assumptio n that investors cannot defer the taxation of capital gains by costles sly short selling tax exempt perfect substitute securities. Contrary t o existing literature, it is demonstrated that trading rules of immedi ate realization of losses and voluntary deferral of gains may not be o ptimal. Further, equilibrium prices are shown to be higher for stocks held by investors with large accrued capital gains and lower for stock s held by investors with small accrued capital gains or losses. (C) 19 98 Elsevier Science B.V. All rights reserved.