Executives’ Tax-advantaged Trusts and IPO Outcomes

50 Pages Posted: 3 Jul 2016 Last revised: 2 Mar 2019

See all articles by Michael Dambra

Michael Dambra

SUNY at Buffalo - School of Management

Matthew Gustafson

Pennsylvania State University - Smeal College of Business

Phillip J. Quinn

University of Washington - Foster School of Business

Date Written: February 4, 2019

Abstract

We examine the prevalence and determinants of CEOs’ use of tax-advantaged trusts prior to their firm’s IPO. Twenty-three percent of CEOs use tax-advantaged pre-IPO trusts, and share transfers into tax-advantaged trusts are positively associated with CEO equity wealth, estate taxes, and dynastic preferences. We estimate that pre-IPO trust use increases CEOs’ dynastic wealth by approximately $830,000 on average. We next examine a simple model’s prediction that trust use will be positively related to IPO-period stock price appreciation. We find that trust use is associated with twelve percent higher one-year post-IPO returns, but is not significantly related to the IPO’s valuation, filing price revision, or underpricing. This evidence is consistent with CEOs’ personal finance decisions prior to the IPO containing value relevant information that is not immediately incorporated into market prices.

Keywords: Tax-advantaged trusts, CEO private information, taxes, initial public offering, post-IPO performance

JEL Classification: D14, H26, G32, M41

Suggested Citation

Dambra, Michael and Gustafson, Matthew and Quinn, Phillip J., Executives’ Tax-advantaged Trusts and IPO Outcomes (February 4, 2019). 28th Annual Conference on Financial Economics and Accounting. Available at SSRN: https://ssrn.com/abstract=2803006 or http://dx.doi.org/10.2139/ssrn.2803006

Michael Dambra

SUNY at Buffalo - School of Management ( email )

354 Jacobs Management Center
Buffalo, NY 14260-1660
United States
716-645-3237 (Phone)

Matthew Gustafson

Pennsylvania State University - Smeal College of Business ( email )

East Park Avenue
University Park, PA 16802
United States

Phillip J. Quinn (Contact Author)

University of Washington - Foster School of Business ( email )

4295 E Stevens Way NE
PACCAR Hall #468
Seattle, WA 98105
United States

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