Question: The underwriter bears risk with a firm commitment because it buys the entire issue. Conversely, the investment banker avoids this risk under a best-efforts offering

The underwriter bears risk with a firm commitment because it buys the entire issue.

Conversely, the investment banker avoids this risk under a best-efforts offering because it does not purchase the shares. Firm commitment underwriting is far more prevalent for large issues than is best-efforts underwriting. For an offering of a given size, the direct expenses of best-efforts underwriting and firm commitment underwriting are of the same order of magnitude.

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