Initial Public Offering Underpricing: The Issuer's View--A Comment.

The author considers the underpricing of initial public offerings and the wealth transfers implicit in that underpricing. He finds that initial returns properly measure the "issue cost" effect of underpricing as a fraction of offer size, as in J. R. Ritter (1987). The author presents a measure of the wealth effect of underpricing per share retained. In general, the wealth effects on existing shareholders depend on the extent to which they participate in the offering. From the perspective of issuer's wealth, the author finds that S. M. Dawson's (1987) measure is appropriate only in the special case in which all of the prior owners' shares are sold in the initial public offerings. Copyright 1989 by American Finance Association.