Long-term Capital Gains Taxes and Stock Prices: Evidence from India

International Journal of Finance and Economics, Forthcoming

50 Pages Posted: 11 May 2023

See all articles by Mohammadali Fallah

Mohammadali Fallah

California State University-Fresno; The University of Texas at San Antonio - Alvarez College of Business

Palani-Rajan Kadapakkam

University of Texas at San Antonio - Department of Finance

Date Written: February 9, 2021

Abstract

Prior studies of the relevance of long-term capital gains for stock prices rely on the evidence from the 1997 tax cut in the U.S. The key component of the tax-sensitive ownership in these studies is individual ownership; its average is reported to be as high as 66.7%. The sharp increase in institutional ownership over the last two decades and the concomitant decline in individual ownership raises the question of whether taxes on long-term capital gains are still relevant for stock prices. We examine stock price responses to the 2018 increase in the long-term capital gains tax rate in India, a market where individual stock ownership is only 18.5%. Overall, the evidence provides strong support for the continued relevance of long-term capital gains taxes for stock prices despite individual investors accounting for only a small portion of the stock ownership.

Keywords: Capital gains taxation; Tax capitalization; Lock-in effect; Indian stock market

JEL Classification: G12, H24, G15, G14

Suggested Citation

Fallah, Mohammadali and Kadapakkam, Palani-Rajan, Long-term Capital Gains Taxes and Stock Prices: Evidence from India (February 9, 2021). International Journal of Finance and Economics, Forthcoming , Available at SSRN: https://ssrn.com/abstract=4431412

Mohammadali Fallah (Contact Author)

California State University-Fresno ( email )

United States

The University of Texas at San Antonio - Alvarez College of Business ( email )

United States

Palani-Rajan Kadapakkam

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States

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