Underwriter Compensation Structure: Can it Really Bond Underwriters?

28 Pages Posted: 18 Jan 2014

See all articles by Jacqueline L. Garner

Jacqueline L. Garner

Georgia Institute of Technology - Scheller College of Business

Beverly B. Marshall

Auburn University Harbert College of Business

Date Written: February 2014

Abstract

Underwriter compensation can be structured as all cash or a combination of cash and warrants. Using a sample of small initial public offerings (IPOs), we find that underwriter compensation contracts that include warrants in exchange for cash can serve as certification for IPO firms by substituting for reputation capital. When underwriters accept warrants when they could have received more cash compensation, the IPOs avoid the well documented long‐run underperformance. However, when underwriters receive warrants after maximizing cash compensation, the IPO experiences higher underpricing and poorer long‐run performance. The findings are consistent with a motivation by the underwriters to circumvent regulatory constraints.

Keywords: initial public offerings, underwriting compensation, underpricing, regulatory guidelines

JEL Classification: G18, G24

Suggested Citation

Garner, Jacqueline L. and Marshall, Beverly B., Underwriter Compensation Structure: Can it Really Bond Underwriters? (February 2014). Financial Review, Vol. 49, Issue 1, pp. 21-48, 2014. Available at SSRN: https://ssrn.com/abstract=2381000 or http://dx.doi.org/10.1111/fire.12024

Jacqueline L. Garner (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Beverly B. Marshall

Auburn University Harbert College of Business ( email )

415 Magnolia Ave.
Auburn, AL 36849
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
501
PlumX Metrics