Underwriters Put: Evidence from Norway, Sweden and Denmark: Option Pricing Theory Applied on the Underwriting Fee Paid in Scandinavian Rights Issues

Rights issues are a common way for raising equity in the Scandinavian market (Norway, Sweden and Denmark). We have investigated underwritten rights issues in the Scandinavian countries for the period 2002-2010. Our full sample consists of 101 rights issues. The focus of this study is to examine the relationship between risk and reward relating to underwriting services and possible differences within Scandinavia. Based on the suggestion of Galai and Schneller (1978) we have assessed the value of the underwriting fee using option pricing framework. Our analyses shows that the underwriting fee charged in the Scandinavian market produces excess returns to the underwriters. The mean underwriting fee charged is found to be 3.58 %. The underwriters earned an average excess return of 2.72 %, or 76 %of the underwriting fee. The highest degree of mispricing we observed in the Swedish market, where excess returns to the underwriter average 3.63 %. Norway seems to have the most efficiently priced underwriting market. We also had a qualitative approximation to our problem where we interview three investors and three banks.