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

Kevin Holland, Richard H G Jackson

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Individuals investing in a venture capital trust (VCT) 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 crosssectional 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.
Original languageEnglish
Pages (from-to)1-27
Number of pages27
JournalAccounting and Business Research
Volume41
Issue number1
DOIs
Publication statusPublished - 2011

Keywords

  • venture capital trust
  • taxation
  • relief
  • lock-in effect
  • listing

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