Staff Working Paper No. 988
By Alex Kontoghiorghes
This paper studies the causal effects of personal investment taxes on stock returns and the financial decisions of companies. I exploit a change in legislation in 2013 which allowed stocks listed on the Alternative Investment Market, a sub-market of the London Stock Exchange, to be held in capital gains and dividend tax-exempt investment accounts for the first time. Using a difference-in-differences approach, I find that excess stock returns decreased by their pre-legislation change effective tax rate, and that firms adjusted their capital structure and increased their spending on dividends, capital, and labour, in line with the ‘traditional view’ of corporate investment.
This version was updated in December 2023.
Do personal taxes affect investment decisions and stock returns?
