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Journal of Accounting and Economics Vol. 61 No. 2-3 2016

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

Oliver Zhen Li1; Yupeng Lin2; John R. Robinson3

1 National University of Singapore · 2 City University of Hong Kong · 3 Texas A&M University

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.

DOI
10.1016/j.jacceco.2015.10.004
Volume
61
Issue
2-3
Pages
465-485
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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