Tax Incentives on Equity and Firms' Cost of Capital: Evidence from the Quebec Stock Savings Plan

Abstract:     
We empirically investigate the impact of the QSSP tax incentive on the issue price of shares of initial public offerings of Quebec-based firms during 1982 to 2002. Consistent with expectations, we find that, after controlling for IPO underpricing, the underpricing of IPOs is significantly negatively associated with the QSSP deduction. However, our results suggest that although issuing corporations benefited from the QSSP program through higher issue prices, Quebec individual investors reaped a much larger proportion of the tax benefit than the corporations. Furthermore, contrary to expectations, our evidence indicates that the presence of non-QSSP eligible investors had no significant effect on the sharing of the tax benefit.

Number of Pages in PDF File: 49

Keywords: Implicit taxes, Initial public offerings, Underpricing, Marginal investor, Tax incentives, Quebec Stock Savings Plan

JEL Classification: G18, G32, H22, H30, H32

working papers series