Why Stocks Fall After Being Donated

The explanations range from shady to simple.

'Tis the season to donate... and keep the tax deductions.

Photographer: Michael Nagle/Bloomberg via Getty Images
This post originally appeared in Money Stuff.

What is going on here?

[Michael] Milken was among hundreds of people who donated stock to charities near price peaks or a few weeks before the stocks tanked, a Wall Street Journal analysis of federal data shows. Such donations occurred more often than chance would dictate, according to researchers interviewed by the Journal.

One thing to say is that if you look at the entire universe of people who sell stock, they can't have better-than-chance timing in the aggregate. More people sell after peaks than before peaks; that is just how peaks work. Perhaps the people in the Wall Street Journal's sample -- of "some 14,000 donations of stock to private foundations" -- are also particularly good at timing their stock sales, though the article doesn't suggest that. If not, you are left with the odd conclusion that rich sophisticated investors are better at giving away stock before it goes down than they are at selling it before it goes down.

Why would that be? From the article:

Good luck or coincidence is one explanation for many of the well-timed stock gifts. Academic researchers say another possible explanation for some, given the outsize number of such gifts, is that some donors might be guided by inside information or backdating their stock gifts. Legal experts don’t agree on whether donating based on nonpublic information would be unlawful. Backdating a gift could be tax fraud, tax lawyers said.

I don't know the facts of any particular case, but in general "inside information" is an unsatisfying explanation. If these hundreds of rich people were all privy to inside information in the companies they invested in, and were willing to use that information for their own personal profit, why use it just to minimize taxes on donations? You can make a lot more money selling stock and keeping the money than you can donating stock and keeping the tax deductions.

Of course one answer would be that donating based on inside information really might not be illegal: With no sale of securities, how can you be committing securities fraud? This is not legal advice but it seems intuitive to me. Perhaps some sample of rich people regularly receive inside information about the companies that they invest in, and want to use that information to profit, but feel constrained enough by the securities laws that they won't just trade on it. But if they can donate to charity in a way that takes advantage of inside information? Well, that's a win-win.

Backdating, on the other hand, seems like an obvious and tempting explanation: You can't backdate a stock sale (if you sell after the stock drops, no one's going to pay you the pre-drop price), but you can donate stock after it drops and then, when you're doing your taxes months later, have a memory lapse about exactly when your donation occurred. But this answer may be ruled out by the Journal's methodology, which is based on reviewing investors' Form 4 and Form 5 filings. Those have to be filed fairly promptly after a transaction -- days, not months -- so if you are looking only at transactions reported on those filings, you will probably not get a lot of wildly backdated donations. 

One further suggestion from Michael Stern on Twitter is that "many charities have a policy of selling any stock they receive," so "if the gift is large and the stock is illiquid, the charitable gift could be the reason for the subsequent drop in price."

If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Thanks! 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Matt Levine at

    To contact the editor responsible for this story:
    James Greiff at

    Before it's here, it's on the Bloomberg Terminal.