Asymmetric Information, Corporate Myopia, and Capital Gains Tax Rates: An Analysis of Policy Prescriptions

Posted: 8 Apr 1999

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

S. Abraham Ravid

Yeshiva University - Syms School of Business

Abstract

We develop a model of corporate myopia in which the interaction between asymmetric information and short-term trading by equity holders induces firms to undertake short-term rather than long-term projects, which are intrinsically more valuable. We study the effectiveness of alternative policy prescriptions in eliminating myopia. We show that a capital gains tax cut for long-term equity holders induces optimal project selection; an across-the-board tax cut has no such impact. We characterize the long-term capital gains tax rate which eliminates corporate myopia. Further, we show that a long-term capital gains tax-cut does not induce a bias toward inefficient long-term projects when it is, in fact, short-term projects which are more valuable. In contrast, an investment tax credit directed at long-term projects lead to such a bias. Finally, we show that reducing the long-term capital gains tax rate to the level required to eliminate myopic investment behavior may also lead to an increase in government tax revenues.

JEL Classification: H21, G31, D82

Suggested Citation

Chemmanur, Thomas J. and Ravid, S. Abraham, Asymmetric Information, Corporate Myopia, and Capital Gains Tax Rates: An Analysis of Policy Prescriptions. Journal of Financial Intermediation Vol. 8, No. 3, 1999, Available at SSRN: https://ssrn.com/abstract=158046

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

S. Abraham Ravid

Yeshiva University - Syms School of Business ( email )

United States

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