A tax-based motive for the underpricing of initial public offerings

An entrepreneurial wealth-maximizing model of initial public offering (IPO) pricing is presented. The model indicates that personal tax rates on ordinary income and capital gains can influence the degree of underpricing of each IPO issue. The model predicts that a rise in the capital gains tax rate should result in a lower degree of underpricing. This tax-based underpricing hypothesis is tested on the Tax Reform Act of 1986.