Investment commitment and the valuation of underwriting agreements for rights issues
I extend the option pricing framework for the underwriting of rights issues, by considering that the funds received at maturity may already have been committed to a project at the time of signing of the underwriting agreement (investment commitment). The model yields valuations that are up to several times the amount implied by no investment commitment, and this is most pronounced for large issues. An upper bound for the model's explanatory power is obtained by assuming that all issues exhibit full investment commitment; under this assumption, the model explains 40-65% of the overpricing of underwriting agreements in the United Kingdom.
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"The choice between rights offerings and private equity placements,"
SSE/EFI Working Paper Series in Economics and Finance
0452, Stockholm School of Economics, revised 21 Jan 2002.
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