Capital gains lock-in and governance choices

• Main Authors: Dimmock, Stephen Geoffrey, Gerken, William C., Ivković, Zoran, Weisbenner, Scott J.
• Other Authors: Nanyang Business School
• Format: Article
• Language: English
• Published: 2019
• Subjects: Business::Finance; Mutual Fund; Proxy Voting
• Online Access: https://hdl.handle.net/10356/105243; http://hdl.handle.net/10220/50312
• Institution: Nanyang Technological University

Differences in accrued gains and investors’ tax-sensitivity induce variation in a capital gains lock-in effect across mutual funds even for the same stock at the same time. Exploiting this variation, we show this effect influences funds’ governance decisions: higher capital gains decrease the likelihood a fund exits prior to contentious votes and increase the likelihood a fund votes against management. Consistent with tax motivation, these findings are concentrated among funds with tax-sensitive investors. Further, high aggregate capital gains across funds holding a stock predict a higher likelihood management loses a vote and a lower likelihood a contentious vote is proposed.