The Security Market Reaction to Tax Legislation as Reflected in Bond Price Adjustments.

This study analyzes the impact of four tax acts on flower bond prices using a capital markets methodology. While the four tax law changes were not intended specifically to affect the desirability of flower bonds, the estate planning value of the bonds was affected. Moreover, financial institutions investing in these bonds experienced shifts in wealth as a result of the tax law changes. This research focuses on the timing and the extent to which the complex tax Jaw information was impounded into the prices of these specialized Securities. The results indicate that security prices did react to the tax law changes as hypothesized, but that the period of the price adjustment process was lengthy. The results are mixed with respect to whether the market reaction commenced on a timely basis.