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Title: The capital gains lock-in effect on earnings quality
Authors: Feng, Fan
Keywords: DRNTU::Business::Accounting
Issue Date: 2019
Abstract: 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.
DOI: 10.32657/10220/48116
Schools: Nanyang Business School 
Fulltext Permission: open
Fulltext Availability: With Fulltext
Appears in Collections:NBS Theses

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