The Pricing of Best Efforts New Issues



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    • From the School of Business, University of Wisconsin, Madison, Wisconsin. This paper is taken from my Ph.D. dissertation at the University of Minnesota, 1987. My thanks go to the members of my committee: Michael Dothan, John Kareken, Hidehiko Ichimura and especially Edward Prescott and Patrick Hess. I am also grateful to Jay Ritter for giving me both data and advice; to Joseph Williams, Philp Dybvig, and an anonymous referee for many valuable criticisms; and to my parents for a lifetime of support.


This paper offers an explanation for the underpricing of best efforts new issues and demonstrates that best efforts contracts allow issuers to use information from the market. If investors obtain information which indicates that a project will not be profitable, their demand will be low and the offering will be withdrawn. If this information is costly, investors will have to be compensated for its purchase through a lower offering price, which means that issuers will have to underprice. This result is consistent with the empirical observation that underpricing is considerably greater for best efforts than for firm commitment contracts.