The capital gains lock-in effect on earnings quality
The taxation of realized capital gains creates a lock-in effect. I examine how the capital gains lock-in of mutual funds affects their portfolio firms’ earnings quality. I hypothesize and find that unrealized capital gains of mutual funds are positively associated with the earnings quality of the...
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Format: | Theses and Dissertations |
Language: | English |
Published: |
2019
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Online Access: | https://hdl.handle.net/10356/82301 http://hdl.handle.net/10220/48116 |
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Institution: | Nanyang Technological University |
Language: | English |
Summary: | The taxation of realized capital gains creates a lock-in effect. I examine how the capital gains
lock-in of mutual funds affects their portfolio firms’ earnings quality. I hypothesize and find
that unrealized capital gains of mutual funds are positively associated with the earnings
quality of their portfolio firms. Consistent with tax-induced lock-in, the effect of unrealized
capital gains is more pronounced for tax-sensitive mutual funds than for tax-insensitive
mutual funds. My findings are robust to five alternative categories of earnings quality
measures. Moreover, the positive effect of capital gains lock-in on earning quality is stronger
during periods of high capital gain tax and when the mutual fund holdings are highly
concentrated. In sum, my findings suggest that locked-in mutual funds improve their portfolio
firms’ earnings quality through more monitoring. |
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