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To minimize their risk the investment bankers combine

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Unformatted text preview: minimize their risk, the investment bankers combine to form an underwriting syndicate to share the risk and help sell the issue to the public. Managerial Finance 0 Best Efforts Under a best efforts underwriting, the underwriter does not buy the issue from the issuing firm. Instead, the underwriter acts as an agent, receiving a commission for each share sold, and using its “best efforts” to sell the entire issue. This is more common for initial public offerings than for seasoned new issues. Managerial Finance 1 19.4 The Announcement of New Equity and the Value of the Firm The market value of existing equity drops on the announcement of a new issue of common stock. Reasons include Managerial Information Since the managers are the insiders, perhaps they are selling new stock because they think it is overpriced. Debt Capacity If the market infers that the managers are issuing new equity to reduce their debt-equity ratio due to the specter of financial distress the stock price will fall....
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