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Shelf Registration and the Reduced Due Diligence Argument: Implications of the Underwriter Certification and the Implicit Insurance Hypotheses

Published online by Cambridge University Press:  06 April 2009

David W. Blackwell ,
M. Wayne Marr  and
Michael F. Spivey
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Abstract

Critics argue that shelf registration greatly reduces the ability of underwriters to perform adequate due diligence. This argument suggests underwriters will demand greater compensation for shelf issues compared to such traditional issues as an insurance premium for protection against potential litigation or loss of reputation caused by inadequate due diligence. Our findings suggest the presence of such a premium, that the premium is higher for firms with higher expected due diligence liabilities, and that underwriters perceive that shelf registration erodes due diligence and, subsequently, price the due diligence erosion accordingly. This pricing behavior is consistent with our findings that firms with higher expected due diligence liabilities are more likely to choose traditional registration.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 25 , Issue 2 , June 1990 , pp. 245 - 259
Copyright
Copyright © School of Business Administration, University of Washington 1990

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