Capital Gains Tax, Venture Capital, and Innovation in Start-Ups*

Lora Dimitrova and Sapnoti K Eswar

Review of Finance, 2023, vol. 27, issue 4, 1471-1519

Abstract: We examine the effect of staggered changes in the state-level capital gains tax on venture capital (VC)-backed start-ups and show that an increase in the tax rate of VC firms reduces the quantity and quality of patents by the start-ups. The results are consistent with a reduction in VC firms’ incentives to provide effort: increases in the capital gains tax for VC firms lead to incrementally lower innovation exchanges between start-ups in the VC firm’s portfolio. VC firms also decrease the level of investment in start-ups and the size of their portfolio as well as increase the number of start-ups that they write off.

Keywords: Innovation; Capital gains tax; Venture capital; Entrepreneurship (search for similar items in EconPapers)
JEL-codes: G24 H25 L26 O31 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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