Capital gains tax, venture capital and innovation in start-ups
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We examine the effect of staggered changes in the state-level capital gains tax on venture capital (VC)-backed start-ups and show that an increase in the tax rate of VC firms reduces the quantity and quality of patents by the start-ups. The results are consistent with a reduction in VC firms’ incentives to provide effort: increases in the capital gains tax for VC firms lead to incrementally lower innovation exchanges between start-ups in the VC firm’s portfolio. VC firms also decrease the level of investment in start-ups and the size of their portfolio as well as increase the number of start-ups that they write off.
Dimitrova , L & Eswar , S 2023 , ' Capital gains tax, venture capital and innovation in start-ups ' , Review of Finance , vol. 27 , no. 4 , rfac057 , pp. 1471–1519 . https://doi.org/10.1093/rof/rfac057
Review of Finance
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