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The effect of capital gains taxes on the initial pricing and underpricing of IPOs

Listed author(s):
  • Li, Oliver Zhen
  • Lin, Yupeng
  • Robinson, John R.
Registered author(s):

    We investigate the extent to which capitalization of expected capital gains taxes and the lock-in effect induced by the capital gains tax rate differential simultaneously impact the pricing and underpricing of initial public offerings (IPOs). Using a large sample of IPOs from 1987 to 2010, we estimate regressions of offer prices and first-day underpricing on tax rates. Supporting tax capitalization, IPO offer prices decrease in long-term capital gains taxes. Supporting lock-in, IPO underpricing increases in the long-term and short-term tax rate differential. These effects are consistent with capital gains taxes simultaneously reducing IPO proceeds and exacerbating IPO underpricing.

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    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 61 (2016)
    Issue (Month): 2 ()
    Pages: 465-485

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    Handle: RePEc:eee:jaecon:v:61:y:2016:i:2:p:465-485
    DOI: 10.1016/j.jacceco.2015.10.004
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