Competitive Bidding in the Underwriting of Public Utility Securities

Parker, George G. C.; Cooperman, Daniel R.

doi:10.2307/2330633

Cited by 9 publications

(13 citation statements)

References 13 publications

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“…Finally, turning to the coefficient for X^_, we see that although its sign 6 is consistent with the hypothesis that competitive bidding is cheaper than negotiation, its T value is not significant. Within one sample, then, competi?…”

Section: Initial Regression Resultssupporting

confidence: 69%

“…Based on earlier empirical results?particularly those of Parker and Cooperman [6]?our initial thinking involved regressing an issue's effective interest cost on a series of variables designed to reflect: (1) issue size; (2) When focusing on the specification of the various independent variables, we paid particularly close attention to the offering method. With the exception It is interesting to note that the timing of publication of the two papers made it impossible for the authors to make comparisons.…”

Section: Initial Regression Resultsmentioning

confidence: 99%

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Negotiated Versus Competitive Underwritings of Public Utility Bonds: Just One More Time

Fabozzi¹,

West²

1981

The Journal of Financial and Quantitative Analysis

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Section: Initial Regression Resultssupporting

confidence: 69%

Section: Initial Regression Resultsmentioning

confidence: 99%

Negotiated Versus Competitive Underwritings of Public Utility Bonds: Just One More Time

Fabozzi¹,

West²

1981

The Journal of Financial and Quantitative Analysis

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“…The specific issue of competition versus negotiation has been studied [3, 6, 7] as it relates to the desirability of SEC Rule U ‐50. This rule requires competitive bidding for the sale of securities of firms subject to the Public Holding Act of 1935.…”

Section: Prior Researchmentioning

confidence: 99%

“…This position should not be confused with that of [6, 7] (and, to some extent, [3]). The former papers argue that, since they are unable to find a significant cost difference between competitive and negotiated issues, Rule U ‐50 is redundant and should be removed.…”

mentioning

confidence: 98%

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An Analysis of the Flotation Cost of Utility Bonds, 1971–76

Findlay

Johnson

Morton

1979

J of Financial Research

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The ability of public utilities to raise the massive sums which will be needed to meet the nation's requirements for energy and communications will be affected critically by the efficiency of our primary market for money capital. Central to the question of market efficiency, which is of concern to all finance scholars, practitioners and regulators, is the flotation or issuance cost associated with new securities offerings of public utilities. This paper examines the efficiency of the primary market for utility debt securities issued publicly during the period January, 1971 through April, 1976. It seeks to identify the determinants of flotation costs for these issues. Previous studies, areas of inconsistency, and conventional wisdom are presented in establishing an efficient capital market framework for the study. I. Competition, Negotiation, and EfficiencyMost existing studies of capital market efficiency have dealt with the informational efficiency of the secondary market (i.e., transactions in outstanding securities). The primary, or new issues, market consists of transactions on at least two levels: the sale by the issuing firm to the underwriting group and then the resale by the latter to the investing public. Such empirical studies as have been done of the primary market have tended to lump these transactions together or else have concentrated upon the second (e.g., the underpricing of new issues, the hot issues phenomenon). A new issue generally involves the raising of funds for additional capital investment by the firm. A firm that seeks to maximize shareholder wealth and that operates in informationally efficient secondary markets will have released data about any windfalls associated with the investment budget prior to the sale of the new issue, such that the prices of the securities will contain an unbiased estimate of the net present value of the investment budget. What is then left to consider with respect to economic efficiency is the structure, conduct, and performance of the intermediation service provided. Issue cost studies, such as this paper and those discussed later, may be viewed as efforts to gauge the economic efficiency of the first stage of the primary market, or equivalently, the efficiency of the market for investment banker intermediation services. Since no complete theory of the investment banking firm has been forthcoming that is normatively derived and operational, all such studies are open to charges of being ad hoc to a greater or lesser extent.In the context of economic efficiency, the competitive versus negotiated issue debate seems to have been posed inappropriately. A particular service (i.e., a firm underwriting of bonds) would appear to be offered at a price to be determined in either of two ways at

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The States’ Regulatory Climate: Distortion in Public Utility Underwriting Costs

Gorman

Vora²

1991

American Journal of Business

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PUCs ignore the flotation costs. If this is the case, then utilities are indeed shortchanged. The discrepancy between relief sought and relief granted poses a serious problem for the managers of utilities and means a potential loss for the shareholders of utilities. Since the managers know that the state PUC may not allow a part or the whole of flotation costs, their proper role as agents of the shareholders is to minimize this cost. Empirical evidence indicates that they behave otherwise. (See Bhagat and Frost 1986, and the references cited in their study for more discussion of this point.) Hence, the focus of academic research has been the so-called agency costs of differing objectives of shareholders and managers.Managers, however, are monitored not only by shareholders but also by PUCs. In addition to the PUCs, managerial actions are monitored by the Securities and Exchange Commission (SEC). (For more on the effects of the interaction between the PUC and the SEC, see Gorman, Grace and Vora 1989.) The monitoring roles of the shareholders (watchdogs of their own interests) and PUCs (watchdogs of consumers' interests) are complementary. Thus, irrespective of the honesty of managers there is a tradeoff between the wealth/welfare of owners and consumers. Whether the flotation costs incurred are fair or not, if the PUC makes an adjustment for them in the rate of return, then the wealth of shareholders is undisturbed but the wealth of consumers is negatively affected. The converse is true when the flotation costs are not allowed by the PUC. The magnitudes of the impact of fair and unfair costs will, of course, be different. If we consider the fair flotation costs synonymous with managerial honesty in contracting with underwriters, then the picture becomes cloudier. If the PUC judges the flotation costs potentially unfair, then in its role

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Competitive Bidding in the Underwriting of Public Utility Securities

Cited by 9 publications

References 13 publications

Negotiated Versus Competitive Underwritings of Public Utility Bonds: Just One More Time

Negotiated Versus Competitive Underwritings of Public Utility Bonds: Just One More Time

An Analysis of the Flotation Cost of Utility Bonds, 1971–76

The States’ Regulatory Climate: Distortion in Public Utility Underwriting Costs

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