Capital gains tax rates and the cost of capital for small business: evidence from the IPO market

We examine the issue prices of small initial public offerings around the 19 93 tax law change that reduced the capital gains tax on qualified small bus iness stock. We compare the actual issue price of new stock with a benchmar k price that is not affected by the change in capital gains tax. We find th at, after controlling for IPO underpricing, the issue prices of qualifying small business stock after the tax rate change are significantly higher tha n the issue prices before the change. A control sample of nonqualifying fir ms shows no significant difference in issue prices. (C) 1999 Elsevier Scien ce S.A. All rights reserved.