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Is a tax deductibility of R&D investment always good for a firm? The case of IPO underpricing

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  • Zeng, Jing
  • Liu, Xinglin
  • Chan, Kam C.

Abstract

We examine the impact of an R&D tax deduction policy on initial public offering (IPO) underpricing. Our findings suggest that IPO firms subject to the tax deduction policy (treatment firms) exhibit higher underpricing than those not subject to the tax deduction policy (control firms). The results are robust to alternative metrics of underpricing. We attribute to the worsening information asymmetry and agency conflicts in the treatment firms relative to the control firms due to an increase cashflows from tax savings. Additional analysis suggests that the effect is more salient for IPO firms with high information asymmetry and severe agency conflicts.

Suggested Citation

  • Zeng, Jing & Liu, Xinglin & Chan, Kam C., 2024. "Is a tax deductibility of R&D investment always good for a firm? The case of IPO underpricing," Finance Research Letters, Elsevier, vol. 62(PA).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001739
    DOI: 10.1016/j.frl.2024.105143
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    References listed on IDEAS

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    4. Zhao, Binjie & Tan, Jianhua & Chan, Kam C., 2022. "Does a CEO's prior academic experience helpful to an IPO firm? The case of IPO discount," Finance Research Letters, Elsevier, vol. 47(PB).
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    6. Peng, Xuan & Jia, Yibo & Chan, Kam C. & Wang, Xiongyuan, 2021. "Let us work together: The impact of customer strategic alliances on IPO underpricing and post-IPO performance," Journal of Corporate Finance, Elsevier, vol. 67(C).
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