Capital gains tax, venture capital and innovation in start-ups

Lorna Dimitrova; Sapnoti  Eswar

doi:10.1093/rof/rfac057

Capital gains tax, venture capital and innovation in start-ups

Lorna Dimitrova^*, Sapnoti Eswar

^*Corresponding author for this work

Finance (Business School)

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Article number	rfac057
Pages (from-to)	1471–1519
Number of pages	49
Journal	Review of Finance
Volume	27
Issue number	4
Early online date	8 Sept 2022
DOIs	https://doi.org/10.1093/rof/rfac057
Publication status	Published - Jul 2023

Keywords

Innovation
Capital gains tax
Entrepreneurship
Venture capital

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10.1093/rof/rfac057Licence: CC BY

Dimitrova_2022_RF_Capitalgainstax_CC
Copyright © The Author(s) 2022. Published by Oxford University Press on behalf of the European Finance Association. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
Final published version, 612 KBLicence: CC BY

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Capital gains tax, venture capital and innovation in start-ups

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