Do personal taxes affect investment decisions and stock returns?

This paper studies the causal effects of personal investment taxes on stock returns and the financial decisions of companies. I exploit a change in legislation in 2013 which allowed stocks listed on the Alternative Investment Market, a sub-market of the London Stock Exchange, to be held in capital gains and dividend tax-exempt investment accounts for the first time. Using a difference-in-differences approach, I find that excess stock returns decreased by their pre-legislation change effective tax rate, and that firms adjusted their capital structure and increased their spending on dividends, capital, and labour, in-line with the “traditional view” of corporate investment.