Taxes and IPO Pricing: Evidence from U.S. Tax Reform

Abstract

This study examines when and how tax reform impacts the pricing of IPOs. Using the Tax Cuts and Jobs Act of 2017 (TCJA), we examine IPO pricing during the periods of anticipated and post-tax reform. First, we document that firms completing an IPO following the passage of the TCJA experience an increase in valuation. The increase in valuation is significantly lower for firms with net deferred tax assets and U.S. based multinational firms, consistent with those firms benefiting less from the reform. Second, we fail to document an increase in valuation for firms completing their IPO during the period of anticipated tax reform. We further observe that firms did not experience an increased probability of an upward pricing revision during the book-building process during this period, suggesting that the IPO market was unwilling to impound the benefits of anticipated tax reform into offer prices until enactment. This result contrasts with research on the pricing of tax reform for existing publicly traded stock, where prices impound the anticipated benefits from tax reform, far in advance of enactment.