Litigation costs and the underpricing of initial public offerings

Article Abstract:

The propensity of entrepreneurs to underprice initial public offerings (IPO) has always puzzled economists. A review of literature on IPO underpricing dating from 1977 to 1993 was presented. A model of IPO underpricing featuring a risk-averse entrepreneur hoping to optimize the expected utility of his/her period wealth was constructed. Underpricing occurs because an entrepreneur expects to incur litigation costs should share prices fall too low after purchase. Underpricing, therefore, is an up-front opportunity loss which is expected to equalize loss in litigation costs.

Research, Costs (Law), Legal fees

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LIFO adoption and dividend payout

Article Abstract:

A study was conducted to evaluate dividend payout ratios following the adoption of last-in first-out (LIFO) inventory costing method. The study analyzes whether LIFO generates incremental cash flows or retains money for the firm's benefit. Results show that company officials adjust cash dividend and earnings relationships as a partial solution to LIFO's negative earnings impact. However, such adjustment does not neutralize dividend payout effects. Thus, incremental cash flows are retained.

Inventory control

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Personal taxes and the underpricing of initial public offerings

Article Abstract:

A study was conducted to evaluate possible explanations for underpricing initial public offerings (IPOs). Empirical evidence is presented on hypotheses which support underpricing. A model is developed which analyzes the effect of personal taxes and entrepreneurial ownership on the pricing issue. Results indicate that IPOs can be underpriced under some level of ownership and personal tax conditions.

Management, Personal finance

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