Courtney H. Edwards
The University of North Carolina at Chapel Hill
Mark H. Lang
The University of North Carolina at Chapel Hill
Edward L. Maydew
The University of North Carolina at Chapel Hill
Douglas A. Shackelford
The University of North Carolina at Chapel Hill
Abstract: In late 1999, the German government made a surprise announcement that it would repeal the large and longstanding capital gains tax on sales of corporate cross-holdings. The lock-in effect from the corporate capital gains tax was said to act as a barrier to efficient acquisition and divestiture of German firms and divisions and to perpetuate the extensive web of crossholdings among German companies. Many observers predicted that once the lock-in effect was removed, Germany would experience a flurry of acquisition and divestiture activity.
This paper provides cross-sectional evidence on the economic magnitude of the repeal, assesses the likely beneficiaries from the repeal, and predicts which sectors are most likely to experience a surge in acquisition and divestiture activity following the repeal. The results indicate that the economic effects are limited to the six largest banks and insurers and their extensive minority holdings in industrial firms.
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