Long-term capital gains taxes and stock prices: Evidence from India

Prior studies of the relevance of long-term capital gains for stock prices rely on the evidence from the 1997 tax cut in the United States. The key component of the tax-sensitive ownership in these studies is individual ownership; its average is reported to be as high as 66.7%. The sharp increase in institutional ownership over the last two decades to more than 80% and the concomitant decline in individual ownership raises the question of whether taxes on long-term capital gains are still relevant for stock prices. We examine stock price responses to the 2018 increase in the long-term capital gains tax rate in India, a market where individual stock ownership is only 18.5%. Overall, the evidence provides strong support for the continued relevance of long-term capital gains taxes for stock prices despite individual investors accounting for only a small portion of the stock ownership.