Is there a lock-in effect of corporate capital gains taxation? Evidence from the German market

The existence of a so-called lock-in effect, phenomena where individuals defer the disposal of an asset in order to avoid capital gains taxes, is well documented in empirical tax research. There is no empirical evidence, however, on whether this effect also occurs if assets are held by corporations rather than individuals. This paper uses a unique tax reform, the repeal of the German corporate capital gains tax on disposals of equity holdings in 2002, to test for the existence of a lock-in effect of corporate capital gains taxation. I apply a difference-in-difference approach and evaluate the effects of the repeal on the disposal behaviour of German firms. My results, based on an analysis of 655 corporate equity holdings over the period 1999-2005, show an immediate and widespread reaction by German firms to the repeal of the capital gains taxation in 2002 and therefore show evidence of a severe lock-in effect. My findings contribute to better understanding of the lock-in effect of corporate capital gains taxation. They can also help policymakers to identify the possible effects of any changes in corporate capital gains taxation on disposal behaviour of firms.