Mutual Funds’ Capital Gains Lock-in and Earnings Management

61 Pages Posted: 30 Dec 2019 Last revised: 3 May 2023

See all articles by Stephen G. Dimmock

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Fan Feng

Beihang University

Huai Zhang

Nanyang Business School, Nanyang Technological University

Date Written: April 28, 2023

Abstract

Capital gains taxation creates a lock-in effect, increasing investors’ incentives to monitor and decreasing portfolio firms’ incentives to cater to short-term investors. We show a negative relation between lock-in and portfolio firms’ earnings management, and this relation is stronger for capital gains held by tax-sensitive investors. Further, the relation between lock-in and earnings management is stronger when the capital gains tax rate is higher. We show that locked-in funds vote against management and against audit committee members’ reappointment following earnings management. Locked-in funds are less likely to exit a position following disappointing earnings announcements, reducing firms’ incentive to manage earnings.

Keywords: Earnings Quality, Earnings Management, Capital Gains Tax, Capital Gains Lock-in, Mutual Funds

JEL Classification: M40, M41, G23, G34, H20

Suggested Citation

Dimmock, Stephen G. and Feng, Fan and Zhang, Huai, Mutual Funds’ Capital Gains Lock-in and Earnings Management (April 28, 2023). Available at SSRN: https://ssrn.com/abstract=3500675 or http://dx.doi.org/10.2139/ssrn.3500675

Stephen G. Dimmock

National University of Singapore ( email )

15 Kent Ridge Drive
BIZ 1 #7-63
Singapore, 119245
Singapore

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Fan Feng

Beihang University ( email )

Xueyuan Road, Haidian District
Beijing, 100191
China

Huai Zhang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65-6790-4097 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
240
Abstract Views
1,407
Rank
231,576
PlumX Metrics