Capital Gains Tax Overhang and Share Repurchases
Jonathan B. Cohn
University of Texas at Austin
Stephanie A. Sikes
University of Pennsylvania - The Wharton School
January 1, 2010
AFA 2011 Denver Meetings Paper
Anecdotal and empirical evidence suggest that price is an important determinant in firms’ share repurchase decisions. We investigate a factor that could affect a firm’s stock price around a repurchase and thus the number of shares a firm repurchases. Using unique data on the tax-sensitivity of a sample of institutional investors, we find that the tax overhang that results from taxable investors “locking in” their capital gains and demanding compensation for taxes owed upon realization is negatively related to a firm’s decision to repurchase shares and the number of shares repurchased.
Number of Pages in PDF File: 52
Keywords: share repurchases, capital gains lock-in
JEL Classification: G35, H24
Date posted: March 19, 2009 ; Last revised: November 25, 2011
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