Capital gains tax rates and the cost of capital for small business: evidence from the IPO market

Capital gains tax rates and the cost of capital for small business: evidence from the IPO market We examine the issue prices of small initial public offerings around the 1993 tax law change that reduced the capital gains tax on qualified small business stock. We compare the actual issue price of new stock with a benchmark price that is not affected by the change in capital gains tax. We find that, after controlling for IPO underpricing, the issue prices of qualifying small business stock after the tax rate change are significantly higher than the issue prices before the change. A control sample of nonqualifying firms shows no significant difference in issue prices. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Capital gains tax rates and the cost of capital for small business: evidence from the IPO market

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Publisher
Elsevier
Copyright
Copyright © 1999 Elsevier Science S.A.
ISSN
0304-405x
D.O.I.
10.1016/S0304-405X(99)00026-4
Publisher site
See Article on Publisher Site

Abstract

We examine the issue prices of small initial public offerings around the 1993 tax law change that reduced the capital gains tax on qualified small business stock. We compare the actual issue price of new stock with a benchmark price that is not affected by the change in capital gains tax. We find that, after controlling for IPO underpricing, the issue prices of qualifying small business stock after the tax rate change are significantly higher than the issue prices before the change. A control sample of nonqualifying firms shows no significant difference in issue prices.

Journal

Journal of Financial EconomicsElsevier

Published: Sep 1, 1999

References

  • Signaling and the valuation of unseasoned new issues
    Downes, D.; Heinkel, R.
  • The market's problems with the pricing of initial public offerings
    Ibbotson, R.; Sindelar, J.; Ritter, J.
  • Signaling and the valuation of unseasoned new issues: a comment
    Ritter, J.
  • The long-run performance of initial public offerings
    Ritter, J.
  • Speculative prices and popular models
    Shiller, R.
  • Seasoned offerings, imitation costs, and the underpricing of initial public offerings
    Welch, I.

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