Bought Deals: The Value of Underwriter Certification in Seasoned Equity Offerings
Speaker
Abstract
| The bought deal has been the prevalently used method of underwriting SEOs in an expedited manner in Canada since its inception in 1982. Offer prices are set and underwriters commit to purchase offerings several days earlier for bought deals than for firm commitment issues, implying stronger underwriter certification for bought deal issues. Consistent with the certification hypothesis, this study finds a significantly smaller negative stock price reaction around the announcement of bought deals compared to firm commitment issues. Bought deals are also shown to have higher offer price discounts and lower underwriting fees, consistent with the increased risk exposure and reduced distribution effort incurred by the underwriter for bought deal issues. Overall, I show that the savings from the abnormal announcement-day stock price effect of the bought deal outweigh the higher direct costs, lending support to the overwhelming use of the bought deal in Canada. |
| Contact information: |
| Myra Lissenberg |
