The capital gain lock-in effect and seasoned equity offerings

M. Emrul Hasan and Peter Klein

Journal of Banking & Finance, 2022, vol. 138, issue C

Abstract: We extend the capital gain lock-in model developed in Klein (1998) to explain the drop in the price of a company's shares when it conducts an SEO. We show that investors which are locked-in may not be willing to participate in an SEO. As a result, the equilibrium price after the SEO needs to be lower than it would be otherwise in order that the remaining investors are willing to bear the additional investment risk of the SEO. We provide numerical examples to demonstrate our theoretical results. Our theory is well supported by empirical tests of SEO issue-day returns using data on the accrued capital gains of tax-sensitive and tax-insensitive institutional investors.

Keywords: Capital gains tax; Lock-in; General equilibrium model; SEO (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426622000231
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000231

DOI: 10.1016/j.jbankfin.2022.106423

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().