A divided account, also known as “several liability,” refers to an underwriting arrangement in which each underwriter is responsible only for their specific allocation of shares and bears no collective responsibility for the unsold shares of other underwriters. This structure contrasts with joint liability, where underwriters collectively share responsibility for the total issue.
Historical Context
Underwriting has been a critical part of financial markets for centuries, facilitating the process through which companies raise capital by issuing securities. The concept of several liability emerged to balance risk and responsibility among underwriters more equitably. This method gained prominence as financial markets became more complex, allowing for diversified risk among numerous stakeholders.
Types/Categories
- Full Commitment Divided Account: Underwriters are only accountable for their allocated portion of shares and have no obligation beyond that.
- Partial Commitment Divided Account: Underwriters may have some limited collective responsibilities, usually within certain predefined limits.
Key Events
- Early 20th Century: The formalization of underwriting practices with divided accounts became more widespread.
- Securities Act of 1933: Introduced more stringent regulations on underwriting practices, affecting how divided accounts were structured.
Detailed Explanation
Basic Principle
In a divided account, each underwriter is independently responsible for selling their portion of the shares. If an underwriter fails to sell their allocated shares, they may have to hold onto them or sell them at a loss, but this does not impact the other underwriters involved.
graph TD
A[Issuer] -->|Allocation| B[Underwriter 1]
A -->|Allocation| C[Underwriter 2]
A -->|Allocation| D[Underwriter 3]
B -->|Sells Shares| E[Investors]
C -->|Sells Shares| E[Investors]
D -->|Sells Shares| E[Investors]
B -.->|Not Responsible| C
C -.->|Not Responsible| D
D -.->|Not Responsible| B
Mathematical Model
Let’s denote:
- \( U_i \): Number of shares allocated to underwriter \( i \)
- \( P_i \): Price at which underwriter \( i \) sells their shares
- \( S_i \): Number of shares sold by underwriter \( i \)
If \( S_i < U_i \), the underwriter \( i \) bears the loss for unsold shares, calculated as:
Importance and Applicability
Importance
- Risk Management: Divides risk among multiple underwriters, minimizing the impact on any single entity.
- Flexibility: Allows underwriters to specialize and leverage their market expertise.
Applicability
- Initial Public Offerings (IPOs): Widely used in IPOs to distribute risk among investment banks.
- Corporate Bond Issues: Applied to bond issues where the issuer seeks diversified distribution networks.
Examples
- IPOs: Companies like Facebook and Google used divided accounts for their IPOs.
- Corporate Bonds: Large corporations, such as Apple and Microsoft, often issue bonds through divided accounts.
Considerations
- Regulatory Compliance: Ensure compliance with securities laws and regulations.
- Market Conditions: Underwriters must evaluate current market conditions to assess their selling strategies.
Related Terms with Definitions
- Joint Account: An underwriting arrangement where underwriters share collective responsibility.
- Lead Underwriter: The primary entity responsible for coordinating the underwriting process.
Comparisons
| Feature | Divided Account | Joint Account |
|---|---|---|
| Liability Structure | Individual | Collective |
| Risk Distribution | Distributed | Shared |
| Flexibility | High | Moderate |
Interesting Facts
- Divided accounts can reduce potential conflicts among underwriters as they operate independently.
- They offer more precise tracking of performance for each underwriter.
Inspirational Stories
- Historical IPOs: The use of divided accounts in successful IPOs like Amazon and Apple demonstrates their importance in modern finance.
Famous Quotes
- “Finance is not merely about making money. It’s about achieving our deep goals and protecting the fruits of our labor.” - Robert J. Shiller
Proverbs and Clichés
- “Don’t put all your eggs in one basket.” - Highlights the risk diversification in divided accounts.
Expressions, Jargon, and Slang
- Underwriting Syndicate: A group of underwriters working together to sell an issue.
- Book-building: The process of generating and recording investor demand.
FAQs
Q: What is the primary advantage of a divided account?
Q: Are divided accounts common in IPOs?
References
- “Investment Banking Explained” by Michel Fleuriet.
- Securities Act of 1933.
- “Financial Markets and Institutions” by Frederic S. Mishkin.
Final Summary
Divided accounts offer a strategic approach to underwriting by allowing each underwriter to bear responsibility only for their portion of shares, thereby mitigating individual risk and promoting market efficiency. This method, essential in both IPOs and bond issuances, underscores the importance of balanced risk management in financial markets.
Understanding divided accounts is crucial for finance professionals, as it enables a better grasp of how modern underwriting operations manage risk and promote successful capital raising.
