Skip to main content
Article thumbnail
Location of Repository

Taxation influences upon the market in venture capital trust stocks: theory and practice

By Kevin Holland and Richard H.G. Jackson

Abstract

Individuals investing in a Venture Capital Trust IPO listed on the London Stock Exchange receive a number of conditional tax incentives; the time related nature of the associated conditions can create a "lock in effect". By deriving and testing a model of the value of these incentives we examine how they influence investors' pricing and trading decisions. This paper contributes to the ongoing tax capitalisation debate in three ways: first, by calculating the magnitude of the lock-in effect without reference to underlying shareholder records; second, by adopting a time series approach in view of the time varying magnitude of the potential lock-in effect, and thereby avoiding control issues involved in cross-sectional analysis of the effects of taxation on pricing; and third, by focusing on changes in the bid-ask spread rather than, for example, mid price, so reducing the impact of changes in the market value of the instruments under consideration on the analysis. Our results have direct policy implications in suggesting a conflict between the existence of time related conditional tax incentives and the requirement for VCTs to be listed on the London Stock Exchange explicitly in order to promote liquidity in a historically illiquid sector of the market

Topics: HF5601
Year: 2011
OAI identifier: oai:eprints.soton.ac.uk:80380
Provided by: e-Prints Soton

Suggested articles

Citations

  1. (2009a). Budget 2009, Building Britain’s Future - Economic and Fiscal Strategy Report and Financial Statement and Budget Report. HM Treasury, April (available at http://www.hmtreasury.gov.uk/d/Budget2009/bud09_completereport_2520.pdf).
  2. (2009). (2009b). Press Notice 43/09 - State aid approval for the UK’s three tax-based venture capital schemes.
  3. (1995). Applied Econometric Time Series. doi
  4. (2004). Are Investors Rational? Choices among Index Funds’. doi
  5. (2003). Are shareholder dividend taxes on corporate retained earnings impounded in equity prices? Additional evidence and analysis’. doi
  6. (2003). Bridging the finance gap: a consultation on improving access to growth capital for small businesses.
  7. (2000). Capital Gains and dividend capitalisation in firm valuation: Evidence of triple taxation’. doi
  8. (1987). Components of the Bid-Ask Spread and the Statistical Properties of Transaction Prices’. doi
  9. (1998). Costly Search and Mutual Fund Flows’. doi
  10. (1999). Dividend Taxation in Firm Valuation: doi
  11. (2003). Dividend taxes and firm valuation: a re-examination.’ doi
  12. (1997). Do Investors Ignore Dividend Taxation? A Re-examination of the Citizens Utilities Case’. doi
  13. (2000). Econometric Analysis. doi
  14. (2000). Economics of the Public Sector, Third edition.
  15. (2002). Equity Price Pressure from the doi
  16. (1989). Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests.’ doi
  17. (1988). Liquidity and Asset Prices: Financial Management Implications’. doi
  18. (2003). Research into the Enterprise Investment Scheme and Venture Capital Trust - A report prepared for Inland Revenue. Cambridge U.K.: Public and Corporate Economic Consultants
  19. Revenue (2002). IR169 - Venture Capital Trusts - A brief Guide. HM Inland Revenue (online information available at http://www.hmrc.gov.uk/guidance/vct.htm).
  20. (2007). Share Ownership: A report on share ownership as at 31 st doi
  21. (2008). Submission to the House of Lords Finance Bill Subcommittee.
  22. (1988). Tax Reform and the Stock Market: An Asset Price Approach’.
  23. (2008). Tax-Induced Trading around the Taxpayer Relief Act of doi
  24. (2001). The Capital Gain lock-in effect and long horizon return reversal’. doi
  25. (1991). The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains - Evidence from Dual-class British Investment trusts’. doi
  26. (1992). The Empirical Significance of Tax Effects on the Valuation of Dividends: The UK Evidence’. doi
  27. (1995). The Lock-in Effect of Capital Gains Taxes: Evidence from the RJR Nabisco Leveraged Buyout’. doi
  28. (2000). The price of retail investing in the UK’. Financial Services Authority: Occasional Paper Series,
  29. (2001). The Share Price Effects of Dividend Taxes and Tax Imputation Credits’. doi
  30. (1997). Transactions Costs and Holding Periods for Common Stocks’. doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.