Corporate Taxes and Initial Public Offerings: Evidence from the Tax Cuts and Jobs Act

Abstract

We examine the influence of corporate taxes on the pricing of initial public offerings (IPOs). We document an increase in IPO valuations following enactment of the Tax Cuts and Jobs Act. Unlike existing public equities, where prior research suggests prices incorporate the expected benefits of tax reform well in advance of enactment, we do not observe the capitalization of anticipated tax benefits into IPO prices prior to enactment of the tax reform. We also provide evidence that frictions in the IPO market, such as underwriter reputational concerns, may limit the extent to which IPO pricing incorporates anticipated tax reform.

Keywords: corporate income taxes, tax reform, initial public offerings

JEL Classification: H2, G1, M4, K34