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Underwriter Compensation Structure: Can It Really Bond Underwriters?

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  • Jacqueline L. Garner
  • Beverly B. Marshall

Abstract

Underwriter compensation can be structured as all cash or a combination of cash and warrants. Using a sample of small initial public offerings (IPOs), we find that underwriter compensation contracts that include warrants in exchange for cash can serve as certification for IPO firms by substituting for reputation capital. When underwriters accept warrants when they could have received more cash compensation, the IPOs avoid the well documented long-run underperformance. However, when underwriters receive warrants after maximizing cash compensation, the IPO experiences higher underpricing and poorer long-run performance. The findings are consistent with a motivation by the underwriters to circumvent regulatory constraints.

Suggested Citation

  • Jacqueline L. Garner & Beverly B. Marshall, 2014. "Underwriter Compensation Structure: Can It Really Bond Underwriters?," The Financial Review, Eastern Finance Association, vol. 49(1), pages 21-48, February.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:1:p:21-48
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    File URL: http://hdl.handle.net/10.1111/fire.12024
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    Cited by:

    1. Hafiz Hoque, 2022. "Endogenous market choice, listing regulations and IPO spread: Evidence from the London Stock Exchange," Working Papers 2022-02, Swansea University, School of Management.
    2. Amaya, Diego & Brolley, Michael & Smith, Brian F., 2020. "Diamonds in the rough: The value of scouting for early-stage funding," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    3. Carlos Miguel Glória & José Carlos Dias & Aricson Cruz, 2024. "Pricing levered warrants under the CEV diffusion model," Review of Derivatives Research, Springer, vol. 27(1), pages 55-84, April.
    4. Khurshed, Arif & Kostas, Dimitris & Saadouni, Brahim, 2016. "Warrants in underwritten IPOs: The Alternative Investment Market (AIM) experience," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 97-109.
    5. Hafiz Hoque & John Doukas, 2024. "Endogenous market choice, listing regulations, and IPO spread: Evidence from the London Stock Exchange," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2360-2380, April.

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