Working Paper No. 39
By Francis Breedon and Ian Twinn
In the United Kingdom, almost all equity rights issues are underwritten. Recently, some have argued that the fee charged by underwriters for this service is too high. This paper compares the fee charged by sub-underwriters with the cost of buying a similar put option in the traded option market. Although the option supplied by sub-underwriters could not in practice be purchased in the traded option market, we feel that this comparison is fairer than the simple theoretical Black and Scholes value used in other studies (eg Marsh (1994). We find that, although the option value is higher than estimated by Marsh, it is still less than the fee charged by sub-underwriters.
Valuation of underwriting agreements for UK rights issues: evidence from the traded option market