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Personal Taxes and the underpricing of initial public offerings
Author(s) -
Dandapani Krishnan,
Dossani Rafiq,
Prakash Arun J.,
Reside Mary Ann
Publication year - 1992
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090130402
Subject(s) - initial public offering , economics , empirical evidence , section (typography) , empirical research , monetary economics , microeconomics , business , financial economics , advertising , philosophy , epistemology
The purpose of this paper is to propose an alternative explanation for the underpricing of initial public offerings (IPOs). The first section reviews the empirical evidence on underpricing IPOs in support of various alternative hypotheses that have been put forth in the literature. This is followed by our model which examines the effect of personal taxes paid by entrepreneurs on the choice of the issue price. We show that, in the presence of taxes and for certain levels of ownership retained by the entrepreneur, it may be preferable to underprice the issue. This theoretical result is reinforced by both the simulation and empirical tests.