Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-27T18:50:11.775Z Has data issue: false hasContentIssue false
  • English
  • Français

An Empirical Examination of Models of Contract Choice in Initial Public Offerings

Published online by Cambridge University Press:  06 April 2009

Ivo Welch
Get access Rights & Permissions [Opens in a new window]

Abstract

This study examines initial public offering contract choice decisions. In best-efforts offerings, minimum sales constraints allow issuers to precommit to withdraw the offering if a fixed minimum number of shares is not sold. In firm-commitment offerings, the over-allotment option allows the underwriter to increase sales when demand is strong. Two theories of contract choice–Benveniste and Spindt (1989) and Ritter's (1987) extension of Rock (1986)–offer predictions about the role of these contract features. We find that the 1977–1982 evidence is consistent with Benveniste and Spindt (1989). The evidence is less supportive of the Ritter (1987) hypothesis that minimum sales constraints serve to reduce the winner's curse of the riskier issuers.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 4 , December 1991 , pp. 497 - 518
Copyright
Copyright © School of Business Administration, University of Washington 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F., and Faulhaber, G. R.. “Signalling by Underpricing in the IPO Market.” Journal of Financial Economics, 23 (08 1989), 303–323.CrossRefGoogle Scholar
Baron, D. P. “A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues.” Journal of Finance, 37 (09 1982), 955–976.CrossRefGoogle Scholar
Barry, C. P.; Muscarella, C. J.; and Vetsuypens, M. R.. “Underwriter Warrants, Underwriter Compensation and The Costs of Going Public. Unpubl. Working Paper, Texas Christian Univ. and Southern Methodist Univ. (02 1990).Google Scholar
Beatty, R. P., and Ritter, J. R.. “Investment Banking, Reputation, and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 15 (01/02 1986), 213–232.CrossRefGoogle Scholar
Benveniste, L. M., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics, 24 (10 1989), 343–361.CrossRefGoogle Scholar
Benveniste, L. M., and Wilhelm, W.. “A Comparative Analysis of IPO Proceeds under Alternative Regulatory Environments.” Journal of Financial Economics, 28 (11/12 1990), 173–207.CrossRefGoogle Scholar
Carter, R., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (09 1990), 1045–1067.CrossRefGoogle Scholar
Grinblatt, M., and Hwang, C. Y.. “Signalling and the Pricing of Unseasoned New Issues.” Journal of Finance, 44 (06 1989), 393–420.CrossRefGoogle Scholar
Guenther, A. E. “Best Efforts vs. Firm Commitment Initial Public Offerings: Evidence on the Information Gathering Theory.” Unpubl. Working Paper, Univ. of Wisconsin (10 1989).Google Scholar
Hansen, R. S. “Evaluating the Costs of a New Equity Issue.” Midland Corporate Finance Journal, 4 (Spring 1986), 42–55.Google Scholar
Hansen, R. S.; Fuller, B. R.; and Janjigian, V.. “The Over-Allotment Option and Equity Financing Flotation Costs: An Empirical Investigation.” Financial Management, 16 (Summer 1987), 24–32.CrossRefGoogle Scholar
Ibbotson, R. G. “Performance of Common Stock New Issues.” Journal of Financial Economics, 2 (09 1975), 235–272.CrossRefGoogle Scholar
Ibbotson, R. G.; Sindelar, J. L.; and Ritter, J. R.. “Initial Public Offerings.” Journal of Applied Corporate Finance, 1 (Summer 1988), 37–45.CrossRefGoogle Scholar
Jegadeesh, N.; Weinstein, M.; and Welch, I.. “Initial Public Offerings and Subsequent Equity Offerings.” Unpubl. Working Paper, Univ. of California/Los Angeles (1990).Google Scholar
Koh, F., and Walter, T.. “A Direct Test of Rock's Model of the Pricing of Unseasoned Issues.” Journal of Financial Economics, 23 (08 1989), 251–272.CrossRefGoogle Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetries, Financial Structure and Financial Intermediation.” Journal of Finance, 32 (05 1977), 371–387.CrossRefGoogle Scholar
Muscarella, C. J., and Vetsuypens, M. R.. “A Simple Test Of Baron's Model of IPO Underpricing.” Journal of Financial Economics, 24 (09 1989), 125–135.CrossRefGoogle Scholar
Noreen, E. W. “Computer Intensive Methods for Testing Hypotheses.” New York: John Wiley and Sons (1989).Google Scholar
Ritter, J. R. “The ‘Hot-Issue’ Market of 1980.” Journal of Business, 57 (04 1984), 215–240.CrossRefGoogle Scholar
Ritter, J. R. “The Costs of Going Public.” Journal of Financial Economics, 19 (12 1987), 269–281.CrossRefGoogle Scholar
Ritter, J. R. “A Theory of Contract Choice.” Unpubl. Working Paper, Univ. of Michigan (1988).Google Scholar
Rock, K. “Why New Issues are Underpriced.” Unpubl. Ph.D. Diss., Univ. of Chicago (1982).Google Scholar
Rock, K. “Why New Issues are Underpriced.” Journal of Financial Economics, 15 (01/02 1986), 187–212.CrossRefGoogle Scholar
Smith, C. W. “Raising Capital: Theory and Evidence.” Midland Corporate Finance Journal, 4 (Spring 1986), 6–32.Google Scholar
Sternberg, T. “Bilateral Monopoly and the Dynamic Properties of Initial Public Offerings.” Unpubl. Working Paper, Vanderbilt Univ. (1989).Google Scholar
Tinic, S. M. “Anatomy of Initial Public Offerings of Common Stock.” Journal of Finance, 43 (09 1988), 789–822.CrossRefGoogle Scholar
Weiss, K. “The Relationship of Offer Price to the Preliminary File Range and the Use of the Overallotment Option in Initial Public Offerings.” Unpubl. Working Paper, Univ. of Michigan (1990).Google Scholar
Welch, I. “Seasoned Offerings, Imitation Costs and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (06 1989), 421–449.CrossRefGoogle Scholar
Welch, I. “Sequential Sales, Path Dependence and Cascades.” Journal of Finance (forthcoming).Google Scholar