Who Sold During The Financial Crisis Of 2008-9? Evidence From Tax-Return Data On Daily Sales Of Stock

Jeffrey L. Hoopes
Ohio State University (OSU) – Department of Accounting & Management Information Systems

Patrick Langetieg
Government of the United States of America – Internal Revenue Service (IRS)

Stefan Nagel
University of Michigan, Stephen M. Ross School of Business; University of Michigan Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research

Daniel H. Reck
University of Michigan at Ann Arbor – Department of Economics

Joel B. Slemrod
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Bryan Stuart
University of Michigan at Ann Arbor – Department of Economics

May 2, 2016


We examine individual stock sales from 2008 to 2009 using population tax return data. The share of sales by the top 0.1 percent of income recipients and other top income groups rose sharply following the Lehman Brothers bankruptcy and remained elevated throughout the financial crisis. Sales by top income and older age groups were relatively more responsive to increased stock market volatility. Volatility-driven sales were not concentrated in any one sector, but mutual fund sales responded more strongly to increased volatility than stock sales. Additional analysis suggests that gross sales in tax return data are informative about unobserved net sales.

Who Sold During The Financial Crisis Of 2008-9? Evidence From Tax-Return Data On Daily Sales Of Stock – Introduction

Periods of turmoil in stock markets—such as September 2008 in the wake of the Lehman Brothers bankruptcy—are associated with large declines in prices, abnormally high intra-day price volatility, and high trading volume. Market commentary often characterizes these periods as “sell-offs.” As always, there is a buyer for every seller, so investors as a group cannot all be sellers. What may be happening instead during these instances is that some investors sell out, leaving the remaining investors to bear the risk of stock ownership. Such a reallocation of asset ownership among heterogeneous investors is consistent with the high level of trading activity observed during such periods. Little is known, however, about the characteristics of the investors that are prone to sell in the midst of market turmoil. This paper uses administrative data from the Internal Revenue Service, consisting of billions of third-party reports on all sales of stock in United States taxable individual accounts, to understand which individuals sold stock during the tumultuous market events of 2008 and 2009. Our main finding is that investors at the very top of the income distribution—both the top 1 percent and even the top 0.1 percent—are, along with older investors, much more likely to sell stock during times of market tumult than other investors.

Financial Crisis

A number of factors can cause certain investors to be relatively sensitive to market tumult. Some investors may be forced to sell due to constraints on their risk-bearing capacity (e.g., leverage constraints, liquidity shocks), some may be less tolerant of short-run risk than the average investor (e.g., close to retirement), some may perceive themselves to be better informed than others and anticipate a further price decline, and some investors may lose trust in the stock market altogether and perceive it as a rigged game. While some of these reasons for selling could apply equally to both institutional and individual investors, others are primarily relevant for individual investors (and the flows they direct in and out of institutional investment products).

Understanding heterogeneity in investors’ propensity to sell sheds light on several key questions in finance and macroeconomics, including the mechanisms that give rise to elevated premia for bearing risk (Bollerslev and Todorov 2011; Martin 2015) and for providing liquidity (Nagel 2012) following market tumult episodes. If part of the investor population has a tendency to sell during times of market turmoil, this leaves a smaller set of investors holding aggregate stock market risk. They must be enticed to do so by a higher risk premium and by greater compensation for absorbing the liquidity demand of those who want to sell. Empirical evidence on such episodic shifts in stock ownership has so far remained largely elusive due to lack of data.

Financial Crisis

In this paper, we study this set of questions with a unique new data set that allows us to track, at a daily frequency, sales of stocks and mutual fund shares in the population of U.S. taxable individual investors. The data are extracted from the universe of (anonymized) tax returns filed with the Internal Revenue Service (IRS), and allow us to match asset sales reported for capital gains taxation purposes with some demographic information on each taxpayer. While we do not observe asset purchases in these tax records, we present indirect evidence from dividend receipts and a supplementary brokerage account data set suggesting that individuals with high levels of gross sales are also, to a substantial extent, net sellers of stocks.

We focus our analysis on 2008 and 2009, and further zoom in on the period immediately following the bankruptcy of Lehman Brothers in September 2008. We find that, starting in September 2008, the share of sales volume attributed to the top 0.1 percent of income recipients rises sharply until the beginning of 2009. More generally, we find that high-income taxpayers have a greater propensity to sell during periods of market tumult. In regression analysis, we measure tumult with lagged one-day changes in the VIX index. The VIX index is a measure of (risk-adjusted) expected market volatility and it is commonly used as a proxy for market tumult and as a financial crisis indicator (see Adrian and Shin 2010; Longstaff 2010; Nagel 2012). Stock market returns are typically negative on days when the VIX rises. We find that sales volume rises much more strongly with lagged VIX changes for the top 95-99, 99-99.9, and 99.9-100 income percentiles than for other income groups over the period 2008 to 2009. In multi-dimensional analysis, both high income and age over 60 are associated with a strongly positive sales volume-VIX relationship, as are income and receipt of Social Security income.

Financial Crisis

Who Sold During The Financial Crisis

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