Capital Gains Taxation and Corporate Investment

David A. Weisbach

This study examines the interaction of dividend taxes and capital gains taxes on the sale of stock. Using a model of the new view of dividend taxation modified to incorporate realization-based capital gains and losses on stock, it shows that there are two interactions that effect the timing of dividend payments. First, there is an incentive to distribute dividends prior to realizing gain on a stock sale. Second, the timing of dividends is affected by considerations parallel to the standard lock-in effects for sales. Finally the paper shows that if there are tax clienteles, the new view no longer holds. The conclusions have a number of policy implications and also may affect empirical strategies used to identify the new view.