The Timing of the Stock Market Reaction to Rifle-Short Transition Rules.

Abstract In the Tax Reform Act of 1986, Congress granted 10. 6 billion of rifle-shot transition rules (RSTRs). These tax provisions benefited only one taxpayer and often were written in ambiguous language so that the beneficiaries could not easily be identified. Because of this secrecy, the timing of the stock market reaction to these provisions is unclear ex ante. An event study, investigating the timing of this reaction, was conducted. The results indicate that the market reacted to these tax provisions before the release of information which clearly identified the beneficiaries. This suggests that some investors were able to take advantage of the uneven playing field created by the secrecy and ambiguity of the RSTRs.