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

Published online by Cambridge University Press:  06 April 2009

Ivo Welch
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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

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