Capital Gains Tax Overhang and Share Repurchases

52 Pages Posted: 19 Mar 2009 Last revised: 25 Nov 2011

Jonathan B. Cohn

University of Texas at Austin

Stephanie A. Sikes

University of Pennsylvania - Accounting Department

Date Written: January 1, 2010

Abstract

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.

Keywords: share repurchases, capital gains lock-in

JEL Classification: G35, H24

Suggested Citation

Cohn, Jonathan B. and Sikes, Stephanie A., Capital Gains Tax Overhang and Share Repurchases (January 1, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1363791 or http://dx.doi.org/10.2139/ssrn.1363791

Jonathan B. Cohn (Contact Author)

University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-6827 (Phone)

Stephanie A. Sikes

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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