The Choice of Issuance Procedure and the Cost of Competitive and Negotiated Underwriting: an Examination of the Impact of Rule 50



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    • Arizona State University. Partial support provided by the Center for Financial Systems Research at A.S.U. The author is grateful to Sanjai Bhagat, James Booth, Kevin Green, Stuart Low, Wayne Marr and Janet Smith and to participants of the A.S.U. Finance Workshop for comments on earlier drafts.


Previous research suggests that firms choose negotiated issuance over competitive despite its apparently higher net interest cost. This result is shown to arise partly from failure to correct for a selectivity bias in the choice of issuance procedures. Two stage analysis is used in a model that includes qualitative and limited dependent variables to re-estimate the net interest cost difference between competitive and negotiated issues. Results support the hypothesis that the choice of issuance procedure is consistent with shareholder wealth maximization. Examination of debt issues subject to Rule 50 of the Public Utility Holding Company Act indicates that the regulation, as applied, is not effective.