General Subscriptions

In a general subscription, the issue is open to any member of the general public to subscribe. In that sense, it is very similar to an initial public offering, though there are some basic differences:

• Underwriting Agreement: The underwriting agreement of an initial public offering almost always involves a firm guarantee and is generally negotiated with the investment banker, while the underwriting agreements for seasoned issues take on a wider variety of forms. First, there is the potential for competitive bids to arise on seasoned issues, since investment bankers have the information13 to promise a fixed price. There is evidence that competitive bids reduce the spread, though even seasoned firms continue to prefer negotiated offerings. Second, seasoned issues also offer a wider range of underwriting guarantees; some issues are backed up by a best efforts guarantee, which does not guarantee a fixed price; other issues come with stand-by guarantees, where the investment banker provides back-up support, in case the actual price falls below the offering price. The payoff from relaxing the guarantee comes as lower underwriting commissions.

• Pricing of Issue: The issuer of an initial public offering has to estimate the value of the firm and then the per-share value before pricing the issue, while the pricing of a seasoned issue starts with the current market price, simplifying the process. Often, the price of a seasoned issue will be set just below the current market price.

The overall evidence on the cost of public offerings indicates that it is still clearly much more expensive to issue stock rather than bonds, and the cost of the issue is a decreasing function of the size of the issue.

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