Capital Gains Lock-In and Governance Choices
57 Pages Posted: 10 Jul 2013 Last revised: 17 Nov 2016
Date Written: November 16, 2016
Differences in accrued gains and investors’ tax-sensitivity induce variation in a capital gains lock-in effect across mutual funds even for the same stock at the same time. Exploiting this variation, we show this effect influences funds’ governance decisions: higher capital gains decrease the likelihood a fund exits prior to contentious votes and increase the likelihood a fund votes against management. Consistent with tax motivation, these findings are concentrated among funds with tax-sensitive investors. Further, high aggregate capital gains across funds holding a stock predict a higher likelihood management loses a vote and a lower likelihood a contentious vote is proposed.
Keywords: Mutual fund, Proxy voting, Corporate governance, Capital-gains tax, Lock-in effect
JEL Classification: G34, G23, H20
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