The End of Germany Incorporated?
We analyze plausibly exogenous changes in corporate minority ownership in Germany and its consequences for firm policies and performance. In December 1999, Germany passed a tax reform that repealed the corporate capital gains tax of approximately 50% on domestic corporate holdings. The tax reform caused many German firms, in particular banks and insurance firms, to sell their minority equity stakes in other publicly listed German firms, altering the network of corporate holdings and corporate control in Germany. We ask whether the realization-based taxation of corporate capital gains discouraged value-enhancing asset reallocation by creating a “lock-in” effect prior to the reform. If corporations had a sub-optimal set of shareholders prior to the reform, we would expect value-increasing changes in corporate policies. We find supportive evidence of this conjecture.