Locked-In: The Effect of CEOs' Capital Gains Taxes on Corporate Risk-Taking

56 Pages Posted: 23 Oct 2017 Last revised: 27 Oct 2017

See all articles by Benjamin Yost

Benjamin Yost

Boston College - Carroll School of Management

Date Written: October 21, 2017


I study the effects of CEOs’ unrealized capital gains tax liabilities (tax burdens) on corporate risk-taking. Recent work suggests that high tax burdens discourage CEOs from selling stock. I hypothesize that this causes the executives to become overexposed to firm-specific risk, thereby reducing their willingness to make risky corporate decisions. In a series of tests, I find that corporate risk-taking decreases as CEOs’ personal tax burdens increase. Further, firms with CEOs who are more locked-in to their stock positions (i.e., CEOs with higher tax burdens) experience larger increases in risk-taking following federal and state tax cuts. When I investigate the mechanism behind this relation, I find that tax cuts trigger stock sales by the locked-in executives, allowing for improved diversification. Overall, my findings indicate that the personal tax burdens of CEOs affect the firm by reducing executives’ preferences for risk at the corporate level.

Keywords: Capital Gains Taxes, Compensation, Corporate Risk-Taking

JEL Classification: G32, H24, J33, M52

Suggested Citation

Yost, Benjamin, Locked-In: The Effect of CEOs' Capital Gains Taxes on Corporate Risk-Taking (October 21, 2017). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3056793

Benjamin Yost (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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