The valuation of sub-underwriting agreements for UK rights issues

Quarterly Bulletin 1996 Q2
Published on 01 June 1996

By Francis Breedon and Ian Twinn of the Bank’s Markets and Trading Systems Division.

Most equity issues in the United Kingdom are underwritten—that is, a group of financial institutions guarantees to buy any unsold shares at a pre-arranged price. The pricing of this guarantee affects the cost and efficiency of industry’s capital raising. Earlier studies in a number of countries, including the United Kingdom, have suggested that underwriting fees are much higher than can be accounted for by fully competitive pricing. This article explores some modifications to those previous calculations and concludes that, while a rather larger part of the fee may be accounted for, there remains a margin still to be explained.

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