An Essay on Financial Innovations: The Case of Instalment Receipts

36 Pages Posted: 23 Mar 2002

See all articles by Narat Charupat

Narat Charupat

McMaster University - DeGroote School of Business

Eliezer Z. Prisman

York University - Schulich School of Business

Date Written: November 2001

Abstract

We investigate the relative pricing of an innovated security called "instalment receipts" (IRs). IRs are securities that evidence the purchase of some underlying securities on an instalment basis. Theoretically, we show that investors with borrowing restrictions will be willing to pay for the leverage benefit embedded in IRs. We then provide an empirical support for our argument. The observed overpricing of IRs relative to their underlying securities implies that by using IRs, the issuers benefit from both an increase in demand and a reduction in the price concessions that they have to make to ensure the success of their offerings.

Keywords: instalment receipts, financial innovations, secondary offerings, borrowing restrictions

JEL Classification: G10, G12, G13, G20

Suggested Citation

Charupat, Narat and Prisman, Eliezer Z., An Essay on Financial Innovations: The Case of Instalment Receipts (November 2001). Available at SSRN: https://ssrn.com/abstract=302242 or http://dx.doi.org/10.2139/ssrn.302242

Narat Charupat (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 ext. 23987 (Phone)

Eliezer Z. Prisman

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
(416) 736-2100 ext. 77948 (Phone)
(416) 736-5687 (Fax)

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