On the Determinants of Underwriting in Swedish Equity Offerings
Abstract: This thesis studies the choice of floatation method using a dataset based on 703 public offerings in Sweden between 2006 and 2017. A logistic model is utilised to study the determinants of underwriting, an ordinary least square model to estimate the direct cost of floatation, and the cost of underwriting is estimated using the Heckman sample selection model. The results are generally aligned with existing research and suggest that underwriters are providers of signalling in equity offerings, but are for our sample to be considered imperfect in providing certification. In contrast to existing beliefs of shareholder takeup, the likelihood of underwriting is increasing in expected shareholder takeup from subscription precommitments. Our explanation for this is bilateral. On the one side, we argue that risk averse firms can ensure successful offerings by using a combination of subscription precommitments and underwriting. On the other side, we reason that high subscription precommitments indicate concentrations of large shareholders. Accordingly, we propose that underwriting in these equity offerings may be a result of agency problems between shareholders. Furthermore, a rights issue paradox is insinuated in the Swedish equity market. However, we limit our inference to mere indications as opposed to definite conclusions, and emphasise that an estimation of the indirect costs is needed to assert the presence of such paradox. Finally, we find that there are economies of scale of underwriting and that the cost of underwriting is decreasing in the insured share in the equity offering.
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