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Hold or sell? How capital gains taxation affects holding decisions

Author

Listed:
  • Annika Hegemann

    (University of Paderborn)

  • Angela Kunoth

    (University of Cologne)

  • Kristina Rupp

    (University of Paderborn)

  • Caren Sureth-Sloane

    (University of Paderborn
    Vienna University of Economics and Business)

Abstract

Investments with exit flexibility require decisions regarding both the investment and holding period. Because selling an investment often leads to taxable capital gains, which crucially depend on the duration of an investment, we investigate the impact of capital gains taxation on exit timing under different tax systems. We observed that capital gains taxation delays exit decisions but loses its decision relevance for very long holdings. Often the optimal exit time, which indicates the maximal present value of future cashflows, cannot be determined analytically. However, we identify the breakeven exit time that guarantees present values exceeding those of an immediate sale. While, after-taxes, an immediate sale is often optimal, long holding periods might also be attractive for investors depending on the degree of income and corporate tax integration. A classic corporate tax system often indicates holdings over more than 100 periods. By contrast, a shareholder relief system indicates the earliest breakeven exit time and thus the highest level of exit timing flexibility. Surprisingly, high retention rates are likely to accelerate sales under a classic corporate system. Additionally, the worst exit time, which should be avoided by investors, differs tremendously across tax systems. For an integrated tax system with full imputation, the worst time is reached earlier than under partial or non-integrated systems. These results could help to predict investors’ behavior regarding changes in capital gains taxation and thus are of interest for both investors and tax policymakers. Furthermore, the results emphasize the need to control for the underlying tax system in cross-country empirical studies.

Suggested Citation

  • Annika Hegemann & Angela Kunoth & Kristina Rupp & Caren Sureth-Sloane, 2017. "Hold or sell? How capital gains taxation affects holding decisions," Review of Managerial Science, Springer, vol. 11(3), pages 571-603, July.
  • Handle: RePEc:spr:rvmgts:v:11:y:2017:i:3:d:10.1007_s11846-016-0197-9
    DOI: 10.1007/s11846-016-0197-9
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    More about this item

    Keywords

    Capital gains taxation; Holding period; Exit flexibility; Investment decisions; Timing decisions;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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