TESTING OF LOCK-IN EFFECT AND CAPITAL GAINS TAXES IMPACT ON CORPORATE M and AS IN EU-COUNTRIES

THE LOCK-IN EFFECT OF CAPITAL GAINS TAXES: EVIDENCE FROM THE RJR NABISCO LEVERAGED BUYOUT

National Tax Journal ◽

10.1086/ntj41789140 ◽

1995 ◽

Vol 48 (2) ◽

pp. 245-259 ◽

Cited By ~ 1

Author(s):

WAYNE R. LANDSMAN ◽

DOUGLAS A. SHACKELFORD

Keyword(s):

Capital Gains ◽

Leveraged Buyout ◽

Capital Gains Taxes ◽

Lock In Effect ◽

Lock In

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Tax-Induced Trading around the Taxpayer Relief Act of 1997

Journal of the American Taxation Association ◽

10.2308/jata.2008.30.1.77 ◽

2008 ◽

Vol 30 (1) ◽

pp. 77-100 ◽

Cited By ~ 19

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.

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Capital Gains Taxes and Acquisition Activity: Evidence of the Lock-in Effect*

Contemporary Accounting Research ◽

10.1506/1717-5042-0880-4p73 ◽

2007 ◽

Vol 24 (2) ◽

pp. 315-344 ◽

Cited By ~ 26

Author(s):

Benjamin C. Ayers ◽

Craig E. Lefanowicz ◽

John R. Robinson

Keyword(s):

Capital Gains ◽

Capital Gains Taxes ◽

Lock In Effect ◽

Lock In

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The Capital Gains Lock-In Effect and Earnings Quality

SSRN Electronic Journal ◽

10.2139/ssrn.3500675 ◽

2019 ◽

Author(s):

Stephen G. Dimmock ◽

Fan Feng ◽

Huai Zhang

Keyword(s):

Earnings Quality ◽

Capital Gains ◽

Lock In Effect ◽

Lock In

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A Study on the Lock-in Effect of Capital Gains Taxation in Housing Markets

Konkuk Research Institute of Real Estate and Urban Studies ◽

10.22423/kreus.2020.13.1.63 ◽

2020 ◽

Vol 13 (1) ◽

pp. 63-83

Author(s):

Ye-sung Oh ◽

Ho-Jin Lee ◽

Se-jin Hwang

Keyword(s):

Housing Markets ◽

Capital Gains ◽

Lock In Effect ◽

Lock In

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Germany's Repeal of the Corporate Capital Gains Tax: The Equity Market Response

Journal of the American Taxation Association ◽

10.2308/jata.2004.26.s-1.73 ◽

2004 ◽

Vol 26 (s-1) ◽

pp. 73-97 ◽

Cited By ~ 21

Author(s):

Courtney H. Edwards ◽

Mark H. Lang ◽

Edward L. Maydew ◽

Douglas A. Shackelford

Keyword(s):

Abnormal Returns ◽

Economic Effects ◽

Capital Gains ◽

Capital Gains Tax ◽

Cross Sectional ◽

Price Response ◽

Corporate Capital ◽

Market Values ◽

Lock In Effect ◽

Lock In

In late 1999, the German government made a surprise announcement that it would repeal the large and long-standing capital gains tax on sales of corporate crossholdings effective in 2002. The repeal has been hailed as a revolutionary step toward breaking up the extensive web of crossholdings among German companies. The lock-in effect from the large corporate capital gains tax was said to act as a barrier to efficient acquisition and divestiture of German firms and divisions. Many observers predicted that once the lock-in effect was removed, Germany would experience a flurry of acquisition and divestiture activity. Several other industrialized countries were poised to follow suit, with similar proposals pending in France, Japan, and the United Kingdom. This paper provides evidence of the economic impact of the repeal by examining its effect on the market values of German firms. While event studies of tax legislation can be difficult, our study is aided by the fact that the repeal was both a surprise and was announced separately from other tax reform proposals. In addition, we provide cross-sectional evidence on the economic magnitude of the repeal, assess the likely beneficiaries from the repeal, and predict which sectors are most likely to experience a surge in acquisition and divestiture activity following the repeal. Our results suggest that the economic effects are highly concentrated. We find a positive association between firms' event period abnormal returns and the extent of their crossholdings, consistent with taxes acting as a barrier to efficient allocation of ownership. However, the reaction is limited to the six largest banks and insurers and their extensive minority holdings in industrial firms. These six large firms have a combined market capitalization equal to 22 percent of all 394 firms in this study. We also find evidence of a positive stock price response to the announcement for industrial companies held by these financial firms, consistent with shareholders in those firms benefiting from the likely reduction in investor-level tax burdens and expected increased efficiency following the tax law change.

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