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characteristics can be altered to better align the interests of different classes of securi-
ties and to protect against the extraction of private benefits of controls by managers.
Turning to specific determinants of issue costs, we survey a large body of empirical
research on the underwriting function in general and on the determinants of underwriter
compensation more specifically. The field continues to only partially understand the ef-
fects of asymmetric information between issuers/underwriters and outside investors and
use of various institutional mechanisms to limit this effect such as the right to renege on
primary offering buy orders, restrictions on short selling by underwriters, restrictions
on short selling by investors and lock-up provisions on insiders, the use of overallot-
ment options, the choice of auditor, price stabilization, shareholder suits against issuers
and underwriters, the effects of new SEC disclosure regulations and how important are
certain accounting rules.
How important is security liquidity to flotation costs and how can this liquidity be
improved cheaply? How important is it to have short selling opportunities or an active
option market for the stock? Do these opportunities increase security price volatility and
does this increase the costs of liquidity? To what extent do various information produc-
ers such as financial analysts, bond rating agencies, auditors, market makers/exchanges
that report bids, asks and transaction prices, and investment bank fairness opinions re-
duce heterogeneous expectations among investors and increase securities trading and
their liquidity? There is also a need to further investigate of the degree of interdepen-
dence of underpricing, underwriting spreads, out of pocket expenses and the probability
of offer withdrawal and why these relationships appear to vary qualitatively by type of
security, which is somewhat puzzling.
Another important question is how underwriter competition is impacted by the entry
of commercial banks and foreign financial institutions. What are the fundamental ser-
vices offered by underwriters and how do these services enhance share liquidity in the
primary and secondary markets and what are the impacts on security prices? Further
analysis is needed on the impacts of investment banking competition, and the inter-
relationship of underwriting services for debt and equity offerings with M&A advisory
services.
How does learning take place in security contract innovation in the private equity
market (venture capital term sheets), private placement market and public security mar-
kets. For example, how have bond covenants, and microfinancing mechanisms evolved?
To what extent are innovations triggered by widely covered scandals, which broadcast
problems in existing contracting technology? Are there spillover effects in contracting
technology across security markets and across countries? What determines the speed of
technology transfers?
Empirical research in this area is constrained by the availability and reliability of data-
bases within the reach of university budgets. One important area that is under-studied
because of a lack of data is corporate bond issue activity. We know very little about
the flotation process for corporate bonds. What are its unique institutional features of
the corporate bond offering process? However, new databases will soon be available
in this area allowing researchers to investigate many interesting questions. What are