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.
Types
- 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.
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.
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:
$$ L_i = (U_i - S_i) \times P_i $$
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.
- Joint Account: An underwriting arrangement where underwriters share collective responsibility.
- Lead Underwriter: The primary entity responsible for coordinating the underwriting process.
FAQs
Q: What is the primary advantage of a divided account?
A: It distributes risk among several underwriters, preventing any single underwriter from bearing too much responsibility.
Q: Are divided accounts common in IPOs?
A: Yes, they are frequently used in IPOs to manage and mitigate risk.