When a corporation offers shares of stock or other securities to the public, it hires an underwriter
Question:
When a corporation offers shares of stock or other securities to the public, it hires an underwriter to conduct the sale. (The underwriter is an investment bank such as Morgan Stanley or Merrill Lynch.) Most commonly, firms and investment bankers use a procedure known as "firm commitment" underwriting. In this arrangement, the underwriter buys the shares from the company and then sells them to the public. If the offering is undersubscribed or if the price must be subsequently lowered to unload the shares, the underwriter, not the firm, suffers the loss. Why do firms and underwriters use this procedure? What is in it for each? How does this means of sale affect the buying public?
Step by Step Answer:
Managerial Economics
ISBN: 9781119554912
5th Edition
Authors: William F. Samuelson, Stephen G. Marks