Prior studies of the relevance of long-term capital gains for stock prices rely on the evidence from the 1997 tax cut in the U.S. The primary component the tax-sensitive ownership in these studies is individual ownership, which is around 66.5%, on average. The sharp increase in institutional ownership since that time and the concomitant decline in individual ownership raises the question of whether long-term capital gains taxes are still relevant for stock prices. We examine the stock price response to the 2018 increase in the long-term capital gains tax rate in India, a market where individual stock ownership is only around 18.5%. Overall, the evidence provides strong support for the continued relevance of long-term capital gains taxes for stock prices despite individual investors accounting for only a small portion of the stock ownership.
Impact of Vertical Mergers on Rivals Cost of Debt, with Mauro Oliveira, Job Market Paper
We examine the impact of vertical mergers on the cost of bank debt of acquirer and target rivals. We explore the predictions of efficiency, collusion, and foreclosure rationales for vertical integration to understand the channels through which rivals’ cost of debt might be affected. We find that rivals of both acquirers and targets experience an increase in their cost of bank debt following a vertical merger. This finding is in contrast to the evidence on stock price reactions which finds either mild effects or positive stock price reactions for rivals. Following a vertical merger, rivals’ bank loan contracts have shorter maturities and more stringent covenants. We also find that rivals hold more precautionary cash after vertical mergers.