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Do personal taxes affect investment decisions and stock returns?

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  • Kontoghiorghes, Alex

    (Bank of England)

Abstract

This paper studies the causal effects of personal investment taxes on stock demand, 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 a capital gains and dividend tax-exempt investment account for the first time. Using a difference-in-differences approach, I find that stock demand temporarily doubled, long-run stock returns decreased by 2 percentage points per month, dividend payments increased by 29%, and that the capital structure and shareholder composition permanently changed post-legislation.

Suggested Citation

  • Kontoghiorghes, Alex, 2022. "Do personal taxes affect investment decisions and stock returns?," Bank of England working papers 988, Bank of England.
    • Handle: RePEc:boe:boeewp:0988
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    More about this item

    Keywords

    Personal investment taxes; tax capitalisation; dividend policy; capital structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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