Government Intervention, Ownership Structure and Firm Value: The Case of the German Tax Reduction Act

Abstract

This paper provides causal evidence on the effect of ownership structure on firm value and on the impact of large tax incentives on the divestiture decision of equity blockholders by exploiting a quasi-experimental policy change in Germany. The 2000 Tax Reduction Act repealed corporate shareholders from capital gains taxation, whereas individual shareholders experienced only minor tax reductions. We show that stronger tax incentives to dispose shares do not necessarily reduce ownership concentration in the presence of strategic value premia as we find an increase in ownership concentration in firms controlled by a (tax exempt) corporate investor in response to the tax repeal. As the general policy of the German government was aiming at a more active market for corporate control via a more dispersed ownership structure, this result is not in line with the intentions of the policy makers. With respect to the relation between ownership structure and firm value the results from our difference-in-differences estimation suggest that the tax repeal was effective in removing market frictions and allowing for a more efficient shareholder structure: we find a positive relationship between ownership concentration and firm value.

Keywords: policy evaluation, ownership concentration, agency conflicts, difference-in-differences estimator, IV estimator

JEL Classification: G30, G32, H32