Firm commitment underwriting risk and the over-allotment option: Do we need further legal regulation?

This article examines firm-commitment initial public offerings, exploring t he ways underwriters use and abuse the over-allotment option to affect lega l price stabilization in after-market trading. After illustrating that unde rwriters always profit when they make full use of the over-allotment option , the authors suggest that the NASD reexamine the size of the over-allotmen t option and require disclosures concerning the use of the option be includ ed in the prospectus distributed to potential buyers of newly issued securi ties.