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The Character and Determinants of Corporate Capital Gains

39 Pages Posted: 12 Dec 2003  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

William M. Gentry

Williams College - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2003

Abstract

This paper analyzes how corporate capital gains taxes affect the capital gain realization decisions of firms. The paper outlines the tax treatment of corporate capital gains, the consequent incentives for firms with gains and losses, the efficiency consequences of these taxes in the context of other taxes and capital market distortions, and the response of firms to these incentives. Despite receiving limited attention, corporate capital gain realizations have averaged 30 percent of individual capital gain realizations over the last fifty years and have increased dramatically in importance over the last decade. By 1999, the ratio of net long-term capital gains to income subject to tax was 21 percent and was distributed across a variety of industries suggesting the importance of realization behavior to corporate financing decisions. Time-series analysis of aggregate realization behavior demonstrates that corporate capital gains taxes impact realization behavior significantly. Similarly, an analysis of firm-level investment and property, plant, and equipment (PPE) disposal decisions and gain recognition behavior similarly suggests an important role for these taxes in determining when firms raise money by disposing of assets and realizing gains.

Keywords: Corporate Taxation, Capital Gains, Corporate Finanace

JEL Classification: H25, G32, G38, K34, E62

Suggested Citation

Desai, Mihir A. and Gentry, William M., The Character and Determinants of Corporate Capital Gains (November 23, 2003). Harvard NOM Working Paper No. 03-55. Available at SSRN: https://ssrn.com/abstract=472181 or http://dx.doi.org/10.2139/ssrn.472181

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Harvard Business School - Finance Unit ( email )

Boston, MA 02163
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617-495-6693 (Phone)
617-496-6592 (Fax)

William M. Gentry

Williams College - Department of Economics ( email )

Fernald House
Williamstown, MA 01267
United States
413-597-4257 (Phone)
413-597-4045 (Fax)

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