Asymmetric Information, Corporate Myopia, and Implications for Capital Gains Tax Rates

Posted: 10 Oct 1998

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 the firm's equity holders induces firm managers to undertake short-term projects rather than long-term projects, which are intrinsically more valuable. In this setting, we analyze the impact of a reduction in the capital gains tax rate on project selection. We show that a capital gains tax cut for investors who hold equity in the firmbeyond a certain length of time can induce optimal project selection by firm managers; an across-the-board tax cut, on the other hand, has no such impact. We characterize the long-term capital gains tax rate which eliminates corporate myopia. We demonstrate that a long-term capital gains tax cut does not create a bias toward inefficient long-term projects in situations where it is the short-term project that is intrinsically more valuable. We further show that, under certain conditions, reducing the long-term capital gains tax rate to the level required to eliminate myopic investment behavior can also lead to an increase in government tax revenues.

JEL Classification: H32

Suggested Citation

Chemmanur, Thomas J. and Ravid, S. Abraham, Asymmetric Information, Corporate Myopia, and Implications for Capital Gains Tax Rates. Available at SSRN: https://ssrn.com/abstract=6463

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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