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

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  • Welch, Ivo

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.

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  • Welch, Ivo, 1991. "An Empirical Examination of Models of Contract Choice in Initial Public Offerings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 497-518, December.
    • Handle: RePEc:cup:jfinqa:v:26:y:1991:i:04:p:497-518_00
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    Cited by:

    1. N. Huyghebaert & C. Van Hulle, 2004. "The Role of Institutional Investors in Corporate Finance," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 689-726.
    2. Christoph Kaserer & Marcus Kraft, 2003. "How Issue Size, Risk, and Complexity are Influencing External Financing Costs: German IPOs Analyzed from an Economies of Scale Perspective," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 479-512, April.
    3. Dunbar, Craig G., 1998. "The Choice between Firm-Commitment and Best-Efforts Offering Methods in IPOs: The Effect of Unsuccessful Offers," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 60-90, January.
    4. Catherine M. Daily & S. Trevis Certo & Dan R. Dalton & Rungpen Roengpitya, 2003. "IPO Underpricing: A Meta–Analysis and Research Synthesis," Entrepreneurship Theory and Practice, , vol. 27(3), pages 271-295, July.
    5. Liu, Jing, 2007. "The impact of credit rating watchlist and effect of underwriter reputation on IPO underpricing," ISU General Staff Papers 2007010108000016596, Iowa State University, Department of Economics.
    6. Sung-Il Cho, 1993. "Who Failed to Go Public with Best Efforts Offerings," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 3(1), pages 63-77, Fall.
    7. Dunbar, Craig G., 1997. "Overallotment option restrictions and contract choice in initial public offerings," Journal of Corporate Finance, Elsevier, vol. 3(3), pages 251-275, June.
    8. Yeoman, John C., 2001. "The optimal spread and offering price for underwritten securities," Journal of Financial Economics, Elsevier, vol. 62(1), pages 169-198, October.
    9. Kim, Yoonha, 2021. "Linking theories of incomplete contracts to empirics in IPO contracting," Finance Research Letters, Elsevier, vol. 41(C).

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