Capital Gains Taxes, Pricing Spreads and Arbitrage: Evidence from Cross-Listed Firms in the U.S.

57 Pages Posted: 11 Mar 2005 Last revised: 15 Nov 2011

Jennifer L. Blouin

University of Pennsylvania - Accounting Department

Luzi Hail

University of Pennsylvania - The Wharton School

Michelle Yetman

University of California, Davis - Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 8, 2009

Abstract

We examine how shareholder-level taxes affect the contemporaneous pricing of foreign firms' U.S. cross-listed and underlying home-country securities surrounding the 1997 reduction in U.S. capital gains tax rates. Consistent with tax capitalization, we find that the performance of cross-listed shares is negatively related to dividend yield, suggesting an abnormal price increase for shares with greater anticipated taxable capital gains. Due to barriers to cross-border arbitrage, underlying home-country securities, on average, do not react during the event, creating a temporary tax-induced pricing spread. When costs of arbitrage are low, the pricing disparity quickly dissipates and home-country shares closely mirror the pricing of their cross-listed counterparts. In further tests, we are unable to document lock-in behavior, which predicates a decrease in prices attributable to a surge in volume for shares with greater accrued taxable capital gains. Overall, our findings suggest that an exogenous shock to the U.S. tax regime reverberates in international asset prices, thereby affecting foreign firms' costs of capital.

Keywords: Tax capitalization, Personal taxes, American Depositary Receipts, Arbitrage, Cost of Capital, International Asset Pricing

JEL Classification: H24, G12, G35, G14, G15

Suggested Citation

Blouin, Jennifer L. and Hail, Luzi and Yetman, Michelle, Capital Gains Taxes, Pricing Spreads and Arbitrage: Evidence from Cross-Listed Firms in the U.S. (January 8, 2009). AFA 2006 Boston Meetings Paper; EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=677040 or http://dx.doi.org/10.2139/ssrn.677040

Jennifer L. Blouin

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Luzi Hail (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)

Michelle Yetman

University of California, Davis - Graduate School of Management ( email )

128 AOB IV
One Shields Avenue
Davis, CA 95616
United States
530-754-7808 (Phone)
530-752-2924 (Fax)

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