The investment banking process
When a firm needs to raise funds in the financial markets, it usually uses the services of an investment banker. First, it must make some initial
decisions regarding how much capital it needs, what kind of securities to issue, and whether to accept competitive bids or negotiate a price privately.
Then it is time for the firm to select an underwriter and begin the issuing process.
However, the competitive bid agreements between underwriters and issuing firms can take a couple of different forms. In some cases, an investment
bank agrees to arrange the sale of the issuing firm's securities and does its best to sell all shares but makes no guarantees to that effect. This is an
example of:
An underwritten arrangement
A bestefforts arrangement
In the event that an issuer elects to use a bestefforts arrangement, who bears all the risk that the stock issue might be undersubscribed? In other
words, who is at risk if the investment bank cannot sell all shares to investors at the time of issue?
Because of the magnitude of the potential losses that may be incurred by an investment bank participating in the sale of a large underwritten security
issue, it is customary for a group of banks to create an underwriting syndicate to reduce the risk exposure of each participating bank. The investment
bank that organizes and leads the syndicate is called the
