Tax incentives on equity and firms' cost of capital:: Evidence from the Quebec stock savings plan

We empirically investigate the impact of the Quebec stock savings plan (QSSP) tax incentive on the issue price of shares of 246 initial public offerings (IPOs) of Quebec-based firms during 1982 to 2002. Consistent with expectations, we find that, after controlling for factors that have been shown to affect IPO underpricing, the underpricing of IPOs is significantly negatively associated with the presence of a QSSP deduction. Thus, investors paid more for IPO shares that were eligible for the QSSP deduction than they would have if the deduction was not available. We find weaker evidence, however, that the premium paid is proportional to the deduction rate. To the extent that the decreased underpricing is the result of implicit taxes rather than competing explanations, our results suggest that, although issuing corporations benefited from the QSSP program through higher issue prices, Quebec individual investors reaped a significant proportion of the tax benefit. Furthermore, our evidence indicates that the presence of non-QSSP eligible investors significantly increased the share of the tax benefit retained by Quebec individual investors.