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Shelf Registration and the Reduced Due Diligence Argument: Implications of the Underwriter Certification and the Implicit Insurance Hypotheses
David W. Blackwell, M. Wayne Marr and Michael F. Spivey
The Journal of Financial and Quantitative Analysis
Vol. 25, No. 2 (Jun., 1990), pp. 245-259
Published by: Cambridge University Press on behalf of the University of Washington School of Business Administration
Stable URL: http://www.jstor.org/stable/2330827
Page Count: 15
You can always find the topics here!Topics: Due diligence, Investment banking, Investment risk, Insurance underwriting, Liability insurance, Insurance premiums, Financial risk, Inside information, Financial securities, Prices
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Critics argue that shelf registration greatly reduces the ability of underwriters to perform adequate due diligence. This argument suggests underwriters will demand greater compensation for shelf issues compared to such traditional issues as an insurance premium for protection against potential litigation or loss of reputation caused by inadequate due diligence. Our findings suggest the presence of such a premium, that the premium is higher for firms with higher expected due diligence liabilities, and that underwriters perceive that shelf registration erodes due diligence and, subsequently, price the due diligence erosion accordingly. This pricing behavior is consistent with our findings that firms with higher expected due diligence liabilities are more likely to choose traditional registration.
The Journal of Financial and Quantitative Analysis © 1990 University of Washington School of Business Administration