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

Author

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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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    Citations

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    Cited by:

    1. Dimmock, Stephen G. & Feng, Fan & Zhang, Huai, 2023. "Mutual funds' capital gains lock-in and earnings management," Journal of Corporate Finance, Elsevier, vol. 80(C).
    2. Fjesme, Sturla Lyngnes & Lv, Jin Roc & Shekhar, Chander, 2023. "The world cup in football and the US IPO market," Journal of Corporate Finance, Elsevier, vol. 80(C).
    3. Edwards, Alexander & Todtenhaupt, Maximilian, 2018. "Capital gains taxation and funding for start-ups," ZEW Discussion Papers 18-046, ZEW - Leibniz Centre for European Economic Research.
    4. Apostolos Dasilas & Chris Grose & Michael A. Talias, 2017. "Investigating the valuation effects of reverse takeovers: evidence from Europe," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 973-1004, November.
    5. Mohammadali Fallah & Palani‐Rajan Kadapakkam, 2023. "Long‐term capital gains taxes and stock prices: Evidence from India," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3033-3054, July.
    6. Edwards, Alexander & Todtenhaupt, Maximilian, 2020. "Capital gains taxation and funding for start-ups," Journal of Financial Economics, Elsevier, vol. 138(2), pages 549-571.
    7. Cong, Lin William & Landsman, Wayne & Maydew, Edward & Rabetti, Daniel, 2023. "Tax-loss harvesting with cryptocurrencies," Journal of Accounting and Economics, Elsevier, vol. 76(2).

    More about this item

    Keywords

    Tax capitalization; Lock-in; IPO underpricing;
    All these keywords.

    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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