WMU News

Market crash likely linked to tax day

April 15, 2000

KALAMAZOO -- While margin calls and a technology sell-off partially account for the past week's historic market crash, experts are at a loss to fully explain the reasons behind the drop in stock prices. But a Western Michigan University faculty member has a good idea as to why investors are liquidating their assets -- tax day looms.

Anthony J. Cataldo, an assistant professor of accountancy in WMU's Haworth College of Business, this month published a book documenting seasonal fluctuations in the stock market. His research shows that since 1913, investors have liquidated stocks whenever surprised by a hefty tax bill.

"People had tremendous capital gains in 1999, and many of them are taking quite a tax hit," Cataldo says. "Investors tend to keep their assets in the market until the last minute in order to maximize their gains. The last minute is here, and it's time to pay up."

While he acknowledges that other market factors have certainly played a part in the sell-off, Cataldo contends that the tax payment effect is significant. He details this effect in Chapter 10 of his book, documenting the effect as far back as 1917-18, when the public was hit with a hefty war tax, and noted it as recently as the late '80s and early '90s, when self employment taxes took a steep hike.

Compounding the 1999 tax hit, Cataldo notes, is the fact that the first estimated payment for 2000 is also due next week.

Because the IRS releases tax data only three years after the fact, it will be some time before the 1999-2000 effect can be statistically documented, Cataldo says.

Cataldo's book, "The January Effect and Other Seasonal Anomalies: A Common Theoretical Framework," was co-written by his wife, Arline A. Savage, an assistant professor of accounting at Oakland University.

Media contact: Jessica English, 616 387-8400, jessica.english@wmich.edu

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