The choice between firm-commitment and best-efforts offering methods in IPOs: The effect of unsuccessful offers

Previous research questions the use of best-efforts offering methods for IPOs since firm-commitment offerings have lower direct issue costs. This paper attempts to explain the choice of best-efforts methods by focusing on an indirect offering cost: the possibility that an offering will be unsuccessful. Determinants of offering success, including offering size, price, underwriter reputation and the clustering of filings, have different impacts on the likelihood of success for these offering methods. Unsuccessful offerings are also found to be costly. Issuers select the offering method that provides the greater rs ante probability of success, all else equal, consistent with cost minimization. (C) 1998 Academic Press.