Capital Gains Taxes and IPO Under-Pricing

40 Pages Posted: 15 Mar 2006

See all articles by Katrina Ellis

Katrina Ellis

Government of the Commonwealth of Australia - Australian Prudential Regulation Authority (APRA)

Oliver Zhen Li

National University of Singapore (NUS)

John R. Robinson

Texas A&M University; Texas A&M University - Department of Accounting

Date Written: March 2006

Abstract

We identify initial public offerings (IPOs) as a setting to study the effect of capital gains taxes on asset prices. The initial (first-day) stock returns are a reasonable estimate of the short term taxable gains incurred by initial investors who bought shares at the offer price. If initial investors are able to shift the short-term capital gains tax burden from selling their shares to equity issuers or subsequent buyers, then the magnitude of IPO under-pricing should increase in short-term capital gains taxes. On the other hand, a historically lower long-term capital gains tax rate offers initial investors the benefit of deferring and reducing capital gains taxes by delaying the sale of their shares. If these tax savings are important, then the magnitude of IPO under-pricing should decrease in long-term capital gains tax rate. We provide empirical evidence supporting both predictions. Broadly speaking, our results suggest that taxes play an important role in valuing securities.

JEL Classification: G12, G24, H24, H25

Suggested Citation

Ellis, Katrina and Li, Oliver Zhen and Robinson, John R., Capital Gains Taxes and IPO Under-Pricing (March 2006). Available at SSRN: https://ssrn.com/abstract=890743 or http://dx.doi.org/10.2139/ssrn.890743

Katrina Ellis (Contact Author)

Government of the Commonwealth of Australia - Australian Prudential Regulation Authority (APRA) ( email )

400 George Street
Sydney, NSW 2000
Australia

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

John R. Robinson

Texas A&M University ( email )

mail stop 4353
Mays School of Business
college state, TX 77843-4353
United States
979-845-3457 (Phone)
979-845-0028 (Fax)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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