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Highlights:
- Concession is the per-share or per-bond compensation paid to the selling group.
- It is a key element in the corporate underwriting process.
- The compensation is paid for the participation of the selling group in distributing the securities.
In the world of corporate underwriting, the term "concession" refers to the per-share or per-bond compensation that is paid to the selling group. A selling group, in this context, includes entities such as investment banks or brokerage firms that help distribute a company’s newly issued securities to the public. This compensation is a form of reward for their efforts in facilitating the sale of the securities.
When a corporation decides to issue stocks or bonds to raise capital, they often enlist an underwriting firm. This firm may not do all the work themselves. Instead, they may form a syndicate of additional firms, known as the selling group, to assist in the distribution of these securities to potential investors. The underwriting firm typically compensates this selling group with a concession for each share or bond sold. The concession can vary depending on the type of security being issued, the scale of the offering, and the specific terms agreed upon between the underwriting firm and the selling group.
The concession is not only a financial incentive for these firms to sell the securities but also serves as a way to ensure that the underwriting process is smooth and efficient. The selling group bears some of the risk of distributing the securities, so the concession acts as a reward for taking on this responsibility.
The amount of the concession is typically determined as a percentage of the price at which the securities are sold. For example, in the case of bonds, the concession might be a few cents per bond sold, while for stocks, it could be a fraction of the price per share. While the concession is often a relatively small part of the overall underwriting fees, it is crucial for motivating the selling group to actively participate in the distribution process.
In conclusion, the concession is a vital aspect of the corporate underwriting process, ensuring that the selling group is adequately compensated for their role in distributing securities. By offering these concessions, underwriters create an incentive structure that aligns the interests of all parties involved, making it easier for companies to raise the capital they need. This compensation helps to mitigate the risks taken by the selling group, ensuring they work diligently to place securities with investors and complete the underwriting process effectively.
