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

Research output: Contribution to journalArticle

11 Citations (Scopus)

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

Fingerprint

Costs
Underwriters
Underpricing
Empirical test
Firm value
Aftermarket
Distribution costs
Market making
Going public

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs. / Booth, Lena.

In: Financial Review, Vol. 30, No. 2, 1995, p. 337-365.

Research output: Contribution to journalArticle

@article{d72171414f0844b7b92fa27df5381f45,
title = "A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs",
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.",
author = "Lena Booth",
year = "1995",
doi = "10.1111/j.1540-6288.1995.tb00836.x",
language = "English (US)",
volume = "30",
pages = "337--365",
journal = "Financial Review",
issn = "0732-8516",
publisher = "Wiley-Blackwell",
number = "2",

}

TY - JOUR

T1 - A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs

AU - Booth, Lena

PY - 1995

Y1 - 1995

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=84987579086&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84987579086&partnerID=8YFLogxK

U2 - 10.1111/j.1540-6288.1995.tb00836.x

DO - 10.1111/j.1540-6288.1995.tb00836.x

M3 - Article

AN - SCOPUS:84987579086

VL - 30

SP - 337

EP - 365

JO - Financial Review

JF - Financial Review

SN - 0732-8516

IS - 2

ER -