Underwriter Certification and the Effect of Shelf Registration on Due Diligence

Abstract

Shelf registration gives underwriters greater flexibility in timing market issues and involves little or no increase in direct costs, since registration fees are exactly the same and underwriter fees seem comparable. Nevertheless, shelf equity issues are rare. I argue that erosion in the due diligence investigation of underwriters is a significant drawback to shelf registration, and this erosion explains the apparent puzzles in the data on shelf versus non-shelf issues. I compare the forecasts of my model to existing empirical evidence and conclude that shelf registration leads to both increased underwriter competition and reduced due diligence.

Keywords: Seasoned equity offerings, follow-on equity, shelf registration, universal shelf, unallocated shelf, reduced due diligence

JEL Classification: G24, G28, G32