NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Gains Lock-In and Governance Choices

Stephen G. Dimmock, William C. Gerken, Zoran Ivković, Scott J. Weisbenner

NBER Working Paper No. 20176
Issued in May 2014
NBER Program(s):AP, CF, PE

Because of differences in accrued gains and investors' tax-sensitivity, capital gains "lock-in" varies across mutual funds even for the same stock at the same time. Using this variation, we show that tax lock-in affects funds' governance decisions. Higher tax lock-in decreases the likelihood a fund sells a stock prior to contentious votes, and increases the likelihood the fund votes against management. Consistent with tax motivations, these findings are concentrated among funds with tax-sensitive investors. High aggregate capital gains across funds holding a stock predicts a higher likelihood management loses a vote and a lower likelihood a contentious vote is proposed.

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Document Object Identifier (DOI): 10.3386/w20176

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