The Effect of Shareholder-Level Capital Gains Taxes on Acquisition Structure

2004 ◽  
Vol 79 (4) ◽  
pp. 859-887 ◽  
Author(s):  
Benjamin C. Ayers ◽  
Craig E. Lefanowicz ◽  
John R. Robinson
Keyword(s):  
Positive Association ◽  
Capital Gains ◽  
Individual Investors ◽  
Price Setting ◽  
Capital Gains Tax ◽  
Publicly Traded ◽  
Corporate Acquisitions ◽  
Tax Rate ◽  
Capital Gains Taxes ◽  
The Individual

This study investigates the effect of shareholder capital gains taxes on the structure of corporate acquisitions. We analyze a sample of large publicly traded firms acquired in taxable cash-for-stock and tax-free stock-for-stock acquisitions from 1975 to 2000. We model acquisition structure (i.e., taxable cash-for-stock acquisitions versus tax-free stock-for-stock acquisitions) as a function of target shareholder capital gains taxes and other economic factors believed to influence acquisition structure. Consistent with expectations, we find a positive association between the capital gains tax rate for individual investors and the use of tax-free stock-for-stock acquisitions. In addition, we find that the effect of the capital gains tax rate for individuals decreases with target institutional ownership (a proxy that represents the likelihood the price-setting shareholder is not subject to the individual capital gains tax rate). We reconcile our analyses with previous studies and identify a plausible explanation for the lack of results in prior research. In supplemental analysis, we also report evidence that corporations “time” the completion of taxable acquisitions around major tax rate changes to minimize shareholder capital gains taxes. In sum, results suggest that shareholder-level taxes have a significant effect on the choice of taxable cash-for-stock versus tax-free stock-for-stock acquisitions, and this effect varies with the tax status of target shareholders.

Tax-Induced Trading around the Taxpayer Relief Act of 1997

2008 ◽  
Vol 30 (1) ◽  
pp. 77-100 ◽  
Author(s):  
Benjamin C. Ayers ◽  
Oliver Zhen Li ◽  
John R. Robinson
Keyword(s):  
Side Effect ◽  
Capital Gains ◽  
Individual Investors ◽  
Capital Gains Tax ◽  
Demand And Supply ◽  
Tax Rate ◽  
Capital Gains Taxes ◽  
Investor Trading ◽  
Lock In Effect ◽  
Lock In

ABSTRACT: We examine investor trading around the passage of the Taxpayer Relief Act of 1997 (TRA97), which reduced the capital gains tax rate from 28 percent to 20 percent. We provide evidence that individual investors increase their demand for equity shares on the announcement day of TRA97, consistent with the capitalization of capital gains taxes. On the effective day of TRA97, we find that individual investors increase the supply of equity shares with accrued gains, consistent with the lock-in effect of capital gains taxes. Regression results suggest that the demand-side effect associated with tax capitalization is a more powerful effect on abnormal trading than the supply-side effect associated with lock-in for the median stock trading around TRA97. Overall, our results suggest that capital gains taxes influence both the demand and supply for equity by tax-sensitive investors and that the effect on demand is more pronounced than the effect on supply.

Capital Gains Taxes and Stock Return Volatility

2013 ◽  
Vol 35 (2) ◽  
pp. 1-31 ◽  
Author(s):  
Zhonglan Dai ◽  
Douglas A. Shackelford ◽  
Harold H. Zhang
Keyword(s):  
Stock Returns ◽  
Stock Return ◽  
Cash Flows ◽  
Capital Gains ◽  
Return Volatility ◽  
Capital Gains Tax ◽  
Tax Rate ◽  
Stock Return Volatility ◽  
Capital Gains Taxes ◽  
The Impact

ABSTRACT This paper presents an empirical investigation of the impact of capital gains taxes on stock return volatility. We predict that the more stock returns are subject to capital gains taxation, the greater the increase in return volatility following a capital gains tax rate cut due to reduced risk-sharing in firms' cash flows between shareholders and the government. Consistent with this prediction, we find larger increases in the return volatility for more appreciated stocks than for less appreciated stocks and for non-dividend-paying stocks than for dividend-paying stocks after both 1978 and 1997 capital gains tax rate reductions. The findings imply that capital gains taxes convey a heretofore overlooked benefit of lower stock return volatility.

Implications of a Lower Capital Gains Tax Rate in the United States

1989 ◽  
Vol 89 (100) ◽  
pp. 1
Author(s):  
International Monetary Fund
Keyword(s):  
United States ◽  
The United States ◽  
Capital Gains ◽  
Capital Gains Tax ◽  
Tax Rate

Does reducing the capital gains tax rate raise or lower investment?

1992 ◽  
Vol 40 (2) ◽  
pp. 207-210
Author(s):  
J.Harold McClure
Keyword(s):  
Capital Gains ◽  
Capital Gains Tax ◽  
Tax Rate

scholarly journals Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes

2011 ◽  
Vol 86 (3) ◽  
pp. 887-914 ◽  
Author(s):  
Jennifer L. Blouin ◽  
Jana S. Raedy ◽  
Douglas A. Shackelford
Keyword(s):  
Generalized Method Of Moments ◽  
Capital Gains ◽  
Share Repurchases ◽  
Individual Investors ◽  
Tax Rates ◽  
Capital Gains Tax ◽  
Firm Level ◽  
Shareholder Taxes ◽  
Tax Returns ◽  
Directors And Officers

ABSTRACT: This study jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. We find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new tax rules. We also find that firms adjusted their distribution policy (specifically, dividends versus share repurchases) in a manner consistent with the altered tax incentives for individual investors. To our knowledge, this is the first study to employ simultaneous equations to estimate both shareholder and managerial responses to the 2003 rate reductions. We find that the generalized method of moments (GMM) estimates are substantially stronger than OLS estimates, consistent with our expectation that investor and manager responses are simultaneously determined. Failure to estimate systems of equations may account for some of the weak and conflicting results from prior studies of the 2003 rate reductions.

scholarly journals CONCEPTUAL BASIS OF TAX POLICY FORMATION IN THE GLOBALIZATION CONDITIONS

2020 ◽  
Vol 6 (2) ◽  
pp. 81-92 ◽  
Author(s):  
Svetlana Khalatur ◽  
Olena Trokhymets ◽  
Oleksandr Karamushka
Keyword(s):  
Tax Policy ◽  
Direct Investment ◽  
Capital Gains ◽  
Tax Revenue ◽  
The European Union ◽  
Tax System ◽  
Tax Rate ◽  
Capital Gains Taxes ◽  
The Impact ◽  
The Eu

The purpose of the article is to analyze the tax systems of the countries of the European Union and Ukraine, the impact of individual indicators of the tax system on the economies development, study the possibility of applying the accumulated experience. The subject-matter of the study is the methodological and conceptual foundations of the tax policy-making process of the EU and Ukraine. Methodology. Based on the analyzed scientific literature on tax policy formulation of countries, the methodological principles of this study provide for the joint application of a set of well-known general scientific and special methods of research in economics. In particular, the dialectical method, the method of scientific abstraction, the method of systematic analysis, economic and mathematical modeling were used. Results. The article analyzes the individual indicators of the tax system functioning of 28 countries of the European Union and Ukraine; and the impact of these indicators on the economy development. In particular, the following indicators were studied: customs and other import duties, firms expected to give gifts in meetings with tax officials; firms that do not report all sales for tax purposes; firms visited or required meetings with tax officials; labor tax and contributions; net taxes on products; other taxes; other taxes payable by businesses; profit tax; tax payments; tax revenue; taxes on exports; taxes on goods and services; taxes on income, profits and capital gains; taxes on income, profits and capital gains; taxes on international trade; time to prepare and pay taxes; total tax rate. The dependence of foreign direct investment on profit tax, tax revenue; taxes on income, profits and capital gains; time to prepare and pay taxes and total tax rate have been studied. The study shows that, on average, tax revenue affects foreign direct investment, net inflows with the same strength as time to prepare and pay taxes, but almost twice as much as taxes on income, profits and capital gains. Practical implications. The article contains a set of tools and rules for reviewing approaches, guidelines and criteria for the effectiveness of Ukraine's tax policy in line with the global development concept. Value / originality. The conceptual criteria for the formation and implementation of the tax policy of the state are determined, it is carried out the comparative analysis of the tax policy of Ukraine and the EU countries within the framework of the European economic integration, which occurs simultaneously with the globalization of the world economy.

scholarly journals Long-Term Capital Gains Tax Strategies: Correlated Protective Put Strategy

2011 ◽  
Vol 2 (8) ◽  
Author(s):  
John R. Aulerich ◽  
James Molloy
Keyword(s):  
Stock Price ◽  
Capital Gains ◽  
Tax Rates ◽  
Capital Gains Tax ◽  
Tax Rate ◽  
Holding Period ◽  
Put Option ◽  
Highly Correlated ◽  
One Year

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">A reduction in the long-term capital gains tax rate provides investors with new strategies to minimize taxes and protect investment gains.<span style="mso-spacerun: yes;">&nbsp; </span>One such opportunity exists when an investor decides to sell a profitable stock with a holding period of less than one-year, resulting in short-term ordinary taxes.<span style="mso-spacerun: yes;">&nbsp; </span>The investor would find it more beneficial to sell the stock after one-year lapses, resulting in lower long-term capital gain taxes, although the longer holding period exposes the investor to the uncertainty of stock price movement.<span style="mso-spacerun: yes;">&nbsp; </span>A strategy to extend the holding period without excess risk would be to use the protective put option strategy, sometimes referred to as &ldquo;investment insurance&rdquo;.<span style="mso-spacerun: yes;">&nbsp; </span>The strategy involves the purchase of a put option to protect against the possible decline in the stock price, to take advantage of the lower long-term capital gains tax rate, and to preserve the upside potential of the stock.<span style="mso-spacerun: yes;">&nbsp; </span>Pursuant to IRS Publication 550, the IRS does not allow the use of a protective put to extend the holding period on the same security considered for sale.<span style="mso-spacerun: yes;">&nbsp; </span>Since the IRS does not allow a direct protective put hedge, this study will explore an alternative strategy involving the purchase of a put on a highly correlated investment to extend the holding period to recognize lower capital gains tax rates.<span style="mso-spacerun: yes;">&nbsp; </span>The paper presents example situations when an investor benefits from utilizing the correlated protective put option strategy.</span></p>

The Effects of the Capital Gains Tax Rate and Expectations of Subsequent Firm Performance on CEO Stock Ownership

2009 ◽  
Vol 31 (2) ◽  
pp. 1-43 ◽  
Author(s):  
Robert F. Gary
Keyword(s):  
Stock Prices ◽  
Fixed Effects ◽  
Abnormal Returns ◽  
Stock Option ◽  
Capital Gains ◽  
Stock Ownership ◽  
Capital Gains Tax ◽  
Tax Rate ◽  
Equity Ownership ◽  
The Relationship

ABSTRACT: This study examines the relationship between the Taxpayer Relief Act of 1997 (TRA97) capital gains tax rate reduction and the level of chief executive officer (CEO) equity ownership. In addition, the relationship between the level of CEO equity ownership and CEO expectations of future stock prices is investigated. Corporate scandals in recent years have increased institutional investors’ advocacy of CEO stock ownership, which investors believe will align CEO interests with those of stockholders. Prior research on the role of taxes in equity-based compensation has focused on stock option exercises, but has not studied how a tax rate change affects CEO ownership. The findings from time-series cross-sectional fixed-effects regression models of ownership levels indicate that the level of CEO ownership is inversely related to the capital gains tax rate, and that this effect varies with the abnormal returns of the firm during the following year.

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