A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

Ritter [14] documents that best efforts IPOs are, on average, more costly to issue than firm commitment IPOs. This paper explains the phenomenon. Two component costs of going public are analyzed: underpricing and underwriter compensation. The model, based on a disagreement about firm value between underwriters and issuers, shows that underpricing is higher for firms using best efforts contracts as these firms, on average, are more speculative. Underwriter compensation is hypothesized to be higher for firms using best efforts contracts because of the high costs of market making for these firms in the aftermarket and the high distribution costs associated with the high risk of a failed offer. Empirical tests strongly support the propositions.

Original languageEnglish (US)
Pages (from-to)337-365
Number of pages29
JournalFinancial Review
Volume30
Issue number2
DOIs
StatePublished - 1995
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs'. Together they form a unique fingerprint.

  • Cite this