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this result to the fact that because of their longer book building experience, U.S. banks
are more likely to have access to key institutional investors and may be in a better posi-
tion to reward investors dynamically for their information revelation. Interestingly, they
show that for most issuers, the gains associated with lower underpricing outweighed the
additional costs associated with hiring U.S. banks, such as the 7 percent gross spread
that is typically paid when U.S. banks are involved (seeChen and Ritter, 2000, and
Hansen, 2001).
Wu and Kwok (2003)study the underpricing, underwriting fees and direct expenses
of global IPOs. They report that global offers significantly reduce underpricing by 4
percentage points relative to purely domestic IPOs. The result can not be explained by
potential selection bias in the offering decision. Underpricing is found to be a decreasing
function of the relative size of the global tranche. They also find that global offers are
more likely as the prior performance of the U.S. stock market rises. They also find no
evidence of differences in underwriting spreads or other expenses.
Bruner, Chaplinsky, and Ramchand (2004)examine the direct and indirect costs of
raising equity capital for a sample of 293 first-time foreign IPOs in the United States
(i.e., these companies did not have their stock traded in a domestic market or other
foreign market prior to the IPO) and compare the costs to those of U.S. IPOs. They con-
clude that in general foreign IPOs experienced approximately the same capital raising
costs as the U.S. IPOs, with the exception of foreign firms with strong investor demand
and upward revisions to offer prices that incurred a smaller underpricing than that of
U.S. IPOs.
Chaplinsky and Ramchand (2004)analyze the choice between issuing public and
private (under Rule 144A) debt by foreign firms. They conclude that SEC Rule 144A,
which permitted firms to raise capital (in terms of both debt and equity) from qualified
institutional buyers without requiring registration of these securities or compliance with
U.S. GAAP, has resulted in the Rule 144A debt market replacing the public debt market
in terms of number and volume of foreign debt issuers, especially for high-yield and
non-rated issues.
3.11.2. Convertible securities and warrants issuance
Convertible debt and equity securities can be viewed as a method of issuing stock in
the future, contingent on the issuer’s financial conditional improving. As such, these
securities are very similar to issuing warrants plus straight debt or preferred stock. These
securities are often issued by privately held firms, which are raising capital from venture
capitalists. These convertible securities are generally convertible preferred stock with an
automatic conversion into common stock if the firm goes public. Unlike public issues
of convertible securities, these privately placed equity issues generally carry powerful
governance rights and may also have the feature that on conversion to common stock,
the liquidation rights of the preferred issue may not have to be relinquished.
Public offerings of convertible securities are frequently convertible debt or straight
debt with detachable warrants. These convertible securities are generally issued out-of-