How do Buyers and Sellers Divide the Surplus? Evidence from Tax Arbitrage

Kristian Rydqvist, Qinglei Dai
2003 Social Science Research Network  
How Do Buyers and Sellers Divide the Surplus? Evidence from Tax Arbitrage The paper studies the price formation around two events which generate tax obligations that differ across investors in the Norwegian stock market: i) the distribution of a tax credit which reduces taxes for Norwegian investors but has no value to tax-exempt or foreign investors, and ii) the distribution of dividends which are tax-exempt for Norwegian investors but subject to a withholding tax for foreign investors.
more » ... n investors. Investors can trade the tax obligation by temporarily transferring the ownership of the stock over the distribution. We estimate how the buyers and the sellers divide the surplus from the magnitude of the price drop relative to the value of the avoided taxes. We find that buyers and sellers split the tax credit in half, which we interpret as a search equilibrium. This finding contrasts sharply with the withholding tax, where sellers capture the surplus net of transaction costs, which we interpret as an arbitrage-free equilibrium. We report patterns in trading volume and ownership structure data which are consistent with these interpretations.
doi:10.2139/ssrn.424980 fatcat:3p24ce73vjhxlkkq5sx3bmd22i