Essays concerning initial public offerings

Abstract

This dissertation uses samples of Initial Public Offerings (IPOs) to examine the separate effects that a capital gains tax and investor interest have on trading volume and returns. Chapter one looks at how different tax rates for long-term and short-term capital gains and losses affect trading in IPOs. Prior to the Tax Reform Act of 1986 (TRA '86), long-term capital gains were taxed at a lower rate than short-term gains, presenting investors with an opportunity to increase their after-tax return by delaying the sale of appreciated assets until after they qualified for long-term status and selling depreciated assets prior to long-term qualification. Using a sample of Initial Public Offering, I find that stocks that appreciated prior to long-term qualification exhibit increased trading volume and decreased returns just after their qualification date, while stocks that depreciated prior to long-term qualification exhibit these effects just prior to their qualification date. Chapter two explores how the previously undefined variable "investor interest" affects an IPO's trading activity. The level of investor interest in an IPO prior to its issue influences its offer price, its initial return and its initial trading volume. After issue, this interest level impacts the stock's long-term trading volume, leading to a positive relationship between an IPO's initial return and its trading volume for more than three years after issuance. Using newspaper references as a proxy for the level of interest in a firm, I find that investor interest is positively related to initial return, initial trading volume and long-term trading volume.