Three Essays on Capital Gain Taxes, Vertical Mergers, and Private Equity




Fallah, Mohammadali

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This dissertation consists of three essays that study the relevance of long-term capital gains for stock prices, examine the impact of vertical integration on the cost of debt of rivals, and explore how managerial incentives influence the duration of private equity funds. The first essay examines the stock price response to an unexpected increase in the long-term capital gains tax rate in India announced in 2018. Utilizing a new direct proxy for a stock's expected capital gains based on analyst forecasts, I show that stocks with higher expected capital gains tax burdens experience larger price declines when an increase in the capital gains tax rate is announced. Examining returns around the effective date of the tax change, I find evidence of tax-motivated selling pressure during the week preceding the effective date. For the week following the effective date, stock returns are higher for firms with more tax-sensitive investors and larger embedded capital gains, consistent with the lock-in effect. My second essay investigates how vertical integrations affect the cost of debt of rivals of the merging firms. Using firm-level bank loan data, I find that lenders impose a higher interest rate spread on loans to rivals after a vertical merger. Analyzing the non-pricing terms of loan contracts, I observe that rivals' loan contracts have shorter maturities, a higher likelihood of being secured, and more restrictive covenants following a vertical merger. Using asset redeploy ability measures to distinguish between efficiency and market foreclosure motives for vertical integrations, I find that the cost of debt increases for rivals following deals that are more likely undertaken because of foreclosure motives. In the third essay, I study whether general partner (GP) incentives impact the duration of a fund. Consistent with the idea that GPs maximize the lifetime revenue of a firm that depends on fees from the current fund and GPs abilities to raise future funds, we find that a fund's duration is shorter when GPs raise a follow-on fund. Funds with very long durations are more likely to be smaller Venture Capital funds with less management experience.


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Capital Gain Tax, Cost of Debt, Private Equity, Vertical Mergers