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Capital Gains Taxes, Pricing Spreads and Arbitrage: Evidence from Cross-Listed Firms in the U.S.
Jennifer Blouin, The Wharton School
Luzi Hail, The Wharton School
Michelle Higgins Yetman, University of California at Davis
ABSTRACT. We examine how shareholder taxes affect the pricing of foreign firms’ U.S. cross-listed and underlying home country securities in the event periods surrounding the 1997 announcement and effective date of the reduction in capital gains tax rates. Consistent with tax capitalization, we find that the performance of cross-listed shares in the U.S. is negatively related to dividend yield suggesting a price increase for shares with greater anticipated taxable capital gains. Home country shares generally do not react, creating a pricing spread. When costs of arbitrage are low the pricing disparity quickly dissipates. We do not find consistent evidence of the lock-in effect, which predicates a decrease in prices attributable to a surge in volume for U.S. cross-listed shares with greater accrued taxable capital gains. Our findings suggest that an exogeno U.S. shock targeted at U.S. tax clientele can reverberate in international asset prices and affect foreign firms’ cost of equity capital.
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