Essays on Capital Taxation, CEO Networks, and Real Investment

Abstract

This collection of essays studies the effects of capital taxation and CEO networks on real investment and allocation of resources. Chapter 1 assesses the effects of capital gains taxes on firms' investment by exploiting a unique institutional feature in Korea, where capital gains tax rates vary by firm size, and a policy reform that reduced the tax rates for firms affected by the new regulations. I find that firms whose capital gains tax rates dropped from 24 percent to 10 percent experienced a large increase in their market value, investment, and equity issuances, consistent with a class of the ``traditional-view'' models predicting that lower capital taxes spur equity-financed investment by increasing the marginal returns on investment. In Chapter 2, my co-author (Sungki Hong) and I quantify the long-run effects of reducing capital taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, and calibrate the model by targeting important micro moments as well as the difference-in-differences estimate of the capital elasticity based on our institutional setting in Korea. We find that the 2014 reform that reduced capital gains tax rates for the affected firms substantially increased investment in the short-run, but accounting for general equilibrium and long-run effects is important to understand the aggregate effects. While Chapters 1 and 2 focus on the role of capital taxation on real investment, Chapter 3 (co-authored with David Schoenherr) investigates the role of CEO networks on credit allocation in private markets. We find that being connected to a new president leads to an increase in social connections to the banking sector for private firms with CEOs from the president’s alumni network. These firms obtain more credit at a lower rate from private banks that appoint an executive from the same alumni network after the election. Our findings suggest that the election of a president from their network increases the influence of the alumni network over resource allocation in private markets, which leads to more resources being (mis-)allocated to firms run by fellow alumni.