Publications and Working Papers

  • “A Tax Lock-in Explanation for Significant Negative Issuance Date Returns in Seasoned Equity Offerings (SEOs)”. Working Paper

    This paper won the Best Paper Award at the 14th Asian Business Research Conference, Dhaka. Here we use an even-study setting to test the effect of capital gains tax “lock-in” on abnormal issuance day returns of SEOs. We find that the abnormal negative offering day return is more negative for stocks with higher accrued gains prior to the SEO.

    Abstract

    This paper uses an even-study setting to test the effect of capital gains tax “lock-in” on abnormal issuance day returns of SEOs. We find that the abnormal negative offering day return is more negative for stocks with higher accrued gains prior to the SEO. This larger drop in offer day closing price from pre-SEO price stems from the weakening of the reluctance to sell by the locked-in investors as more shares are available in the market due to the SEO (Hasan, 2016). This reduces investor’s post-SEO “deferral” or “lock-in” term as developed by Klein (1998). We use 1 year, 2 year and 3 year accrued gains to proxy lock-in. We find that SEO shares with high accrued gains (more locked-in) before issuance experience more decline in prices after issuance. Our empirical examination of U.S. SEOs between 1990 and 2012 strongly supports this contention. We also find that the negative issuance date return is related to offer size and offer price rounding. Our findings are robust to various sub-samples and alternative definitions of lock-in.

    JEL codes: G12; G14; G31; G32; H22

    Keywords: Seasoned equity issues; SEOs; Capital Gains Tax; “Lock-in”; Equity financing; Event Study; Public Policy

    Link: Available upon request. Email mhasan@sfu.ca.

  • “Capital Gains Tax Lock-in Effect Around Seasoned Equity Offerings (SEO): A General Equilibrium Model”. Working Paper

    This paper presents a general equilibrium model that helps explain the price movement of equity before and after SEO in the presence of capital gains taxes.

    Abstract:

    This paper presents a general equilibrium model that helps explain the price movement of equity before and after SEO in the presence of capital gains taxes. We theoretically document how investor’s deferral or “lock-in” term, as developed by Klein (1998), reacts to an SEO that increases the existing number of shares in the market. We argue with the model and numerical examples that prices and returns around SEO, reflect tax “lock-in” effect, and this “lock-in” term decreases from pre-SEO to post-SEO. This reduction in “lock-in” should decrease the post-SEO price from pre-SEO price, and helps explain the negative SEO offer day return puzzle ceteris paribus.

    JEL Codes: D53, G11, G12, H22

    Keywords: Capital gains tax, “Lock-in”, General equilibrium model, SEO

    Link: Available upon request. Email mhasan@sfu.ca.

  • “Capital Gains Tax Lock-in Effect Due to Differential Tax Rates for Short-term and Long-term Holdings: Evidence From IPO Underpricing”. Working Paper

    In this paper, we use the initial public offerings (IPOs) of U.S. common stocks as a platform to explain the capital gains tax “lock-in” effect.

    Abstract

    We use the initial public offerings (IPOs) of U.S. common stocks as a platform to explain the capital gains tax “lock-in” effect. We contend that the “lock-in” effect around IPOs is induced by the U.S. tax codes that allow a preferential tax treatment for long-term (LT) holdings where long-term capital (LT) gains are taxed at a lower rate than short-term (ST) gains. At first, applying Klein’s (1998) “lock-in” model on IPOs, we show that for initial investors who just subscribed to the IPOs, their “lock-in” is explained by the differential ST and LT tax rates along with accrued first day gains ceteris paribus. We find that post-IPO equilibrium price increases with the magnitude of the difference between the ST and LT tax rates. Then, using a large sample of IPOs from 1987 to 2015, we perform several empirical tests and find consistent results with the model outcome that the first day returns of IPOs increases with ST and LT tax rate differential supporting tax “lock-in”.

     JEL Codes: D53, G11, G12, H22

    Keywords: Capital gains tax, “Lock-in”, General equilibrium model, IPO, Underpricing

    Link: Available upon request. Email mhasan@sfu.ca.

  • “Personal Cost and Affordability of Auto Insurance in Canada.” (with Neil Mohindra). FRASER INSTITUTE. OCTOBER 2011

    This study compares the average cost and affordability of automobile insurance premiums in 10 Canadian provinces from 2007 to 2009.

    Key Conclusions:

    • Auto insurance premium costs in provinces with government auto insurance monopolies tend to be higher than observed in private sector, competitive markets
    • From 2007 to 2009, auto insurance has been most costly and least affordable in British Columbia, Ontario, Manitoba, and Saskatchewan— three of which are provinces with government-run auto insurance monopolies. Auto insurance premiums have been consistently most affordable in Alberta, Newfoundland & Labrador, Nova Scotia, Prince Edward Island, and New Brunswick, where auto insurance is delivered in a regulated, competitive, private-sector insurance market.
    • In 2009, Ontario was the province with the least affordable auto insurance. Regulatory severity and insurance fraud have led to higher claim costs per passenger vehicle.
    • Of the four provinces that each have a public auto insurer, Quebec has consistently ranked best on insurance costs, and in 2009 had the lowest average auto insurance premium of all the provinces. Two factors contribute to this performance: the limitation of the public monopoly to bodily injury claims coverage and less severe regulations than the other three provinces.

    Link: “Personal Cost and Affordability of Auto Insurance in Canada.”

  • “Regulation and the Canadian Auto Insurance Market.” Canadian Student Review, FRASER INSTITUTE. OCTOBER 2011

    This study stresses on three major points: First, severe regulation creates high costs for insurers on average. Second, Canadians should ask if the current regulatory environment in the auto insurance industry is working for Canadians? and Third, consumers should be able to choose the insurance they need.

    Key Conclusions:

    The findings show that tougher regulations in Canada are actually making auto insurance more unaffordable. Rate regulations create high costs for insurers via moral hazard and adverse selection. If solvency regulations become onerous, they can cause investment returns to go down. At the same time, mandatory minimum coverage regulations raise the product redesign costs and hinder insurer innovation. These will all lead to higher costs for insurers, and consumers will pay for these costs through elevated premiums.

    Premium prices can be determined either by competitive pricing, where market forces set the price through effective competition among a large number of players, or by regulatory pricing where regulators set the prices through different levels of rate setting and product design regulations. The latter clearly doesn’t work. Then what policy will benefit consumers? Leadbetter et al. (2004) suggested using competitive pricing in auto insurance settings. Their empirical study found that premium volatility in Ontario began increasing following the introduction of rate regulation in 1989. Prior to this, unexplained volatility in Ontario’s automobile insurance premiums was less than for Alberta and the Atlantic provinces, which operated with rate regulatory regimes while Ontario allowed prices to be determined by market forces. Therefore, scaling back regulatory severity and allowing prices to be determined by market forces will benefit consumers. Empirical evidence and economic principles suggest that as long as prices are determined by competition rather than by rate regulation, solvency is appropriately regulated (see Harrington, 1991) and consumers have the freedom to choose the kind of auto insurance they need, and we should expect to observe lower premiums in Canada.

    Link: “Regulation and the Canadian auto insurance market.”

Books and Case Studies

  • A Condensed Study Guide for Level I CFA Exam (Author: M. Emrul Hasan)

    This study guide, authored by M. Emrul Hasan, CFA and published by financetraining.ca, covers the most important and most seen concepts of the Level I CFA exam that can be used as a complementary textbook along with the actual curriculum. Full book can be purchased by contacting financetraining.ca.