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.
Skip Nav Destination
Article navigation
1 September 2009
Research Article|
September 01 2009
Capital Gains Taxes, Pricing Spreads, and Arbitrage: Evidence from Cross‐Listed Firms in the U.S.
Jennifer Blouin;
Jennifer Blouin
University of Pennsylvania.
Search for other works by this author on:
Michelle H. Yetman
Michelle H. Yetman
University of California, Davis.
Search for other works by this author on:
Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
2009
The Accounting Review (2009) 84 (5): 1321–1361.
Citation
Jennifer Blouin, Luzi Hail, Michelle H. Yetman; Capital Gains Taxes, Pricing Spreads, and Arbitrage: Evidence from Cross‐Listed Firms in the U.S.. The Accounting Review 1 September 2009; 84 (5): 1321–1361. https://doi.org/10.2308/accr.2009.84.5.1321
Download citation file:
Pay-Per-View Access
$25.00