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

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  • Li, Oliver Zhen
  • Lin, Yupeng
  • Robinson, John R.

Abstract

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.

Suggested Citation

  • Li, Oliver Zhen & Lin, Yupeng & Robinson, John R., 2016. "The effect of capital gains taxes on the initial pricing and underpricing of IPOs," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 465-485.
  • 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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    1. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-016-0614-9 is not listed on IDEAS

    More about this item

    Keywords

    Tax capitalization; Lock-in; IPO underpricing;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • G1 - Financial Economics - - General Financial Markets
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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