The Determinants of the Demand for Underwriter Services by Hybrid Security Issuers

Abstract

A preference for underwriting of equity rights issues has been identified in the most international markets, even though underwritten issues are associated with a more negative stock market announcement effect than non-underwritten issues. Underwriting is also a prevalent feature of Australian markets. Prior research in Norwegian and New Zealand markets suggests that the demand for underwriter use in equity issues is determined by expected stockholder participation, firm risk, issue size, trading frequency, and issue price discount. This article extends the determinants of the demand for underwriter use to the Australian market and to hybrid instruments. In particular, it explores whether the differences in the institutional and operating characteristics of the Australian market give rise to different determinants for underwriter use compared to other markets and examines the impact of a unique Australian capital raising instrument, company issued warrants, on the demand for underwriting services. The results show that issue size, trading frequency, and market risk are the determinants of the use of underwriters for Australian warrant issuers.