Capital Gains Tax, Venture Capital, and Innovation in Start-ups

68 Pages Posted: 27 Nov 2017 Last revised: 7 May 2019

See all articles by Lora Dimitrova

Lora Dimitrova

University of Exeter

Sapnoti Eswar

University of Cincinnati - Department of Finance - Real Estate

Date Written: May 1, 2019

Abstract

We examine the effect of staggered changes in state-level capital gains tax rates on Venture Capital (VC)-backed start-ups and show that an increase in tax rates reduces patent quantity and quality. The results are consistent with a reduction in VC incentives to provide effort: VC-level tax increases lead to incrementally lower patent production by start-ups located out-of-state, and not linked by a direct flight to the VC investor. We also find evidence of a change in entrepreneurs' incentives: after a tax increase, entrepreneurs decrease innovation risk, and stay invested for longer (the lock-in effect).

Keywords: Real innovation, Capital gains tax, Entrepreneurship, Venture capital

JEL Classification: G24, H25, L26, O31

Suggested Citation

Dimitrova, Lora and Eswar, Sapnoti, Capital Gains Tax, Venture Capital, and Innovation in Start-ups (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3074464 or http://dx.doi.org/10.2139/ssrn.3074464

Lora Dimitrova

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

Sapnoti Eswar (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

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