Taxation and Investor Behavior: Analyzing Portfolio Adjustments, Risk Preferences, and Capital Market Reactions to Fiscal Policy Changes

Abstract

This study aims to analyze the impact of taxation on investor behavior, including their responses to portfolio rebalancing, risk management, and overall market reactions to changes in fiscal policy. Changes in tax policy, such as the rates of capital gains tax, dividend tax, and income tax, significantly affect investors’ portfolios and investment decisions. Thus, the impact of tax changes can be expressed in terms of a shift in investment portfolios, changes in risk profiles, and shifts in overall market risk assessments. Thus, the study primarily focuses on investors’ attitudes toward fiscal policy changes, adjustments in their investment patterns, and their approach to assessing these changes. It fills the gap in the literature by linking taxation, behavioral finance, and capital markets, providing meaningful insights for policymakers, financial planners, and investors in understanding the profound impacts of tax changes on stock market activity. The study also reviews the immediate reactions and long-run adaptations to taxation and examines the consequences for market efficiency, asset pricing, and investors’ confidence.