DP2736 The Seven Percent Solution? An International Perspective On Underwriting Spreads

Author(s): Alexander P. Ljungqvist, William J Wilhelm Jr
Publication Date: March 2001
Keyword(s): Initial Public Offerings, Investment Banking, Underwriting Spreads
JEL(s): G32
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2736

Non-US firms frequently pay a substantial premium to have a US bank lead their initial public offering of equity, even when the issuing firm is not seeking a listing on a US exchange. We provide evidence that this decision reflects an expectation that US banks deliver a higher quality bundle of underwriting services. Specifically, a non-US issuing firm that includes a US bank in its underwriting syndicate can expect to have its offering underpriced by 17.7% less than had it not included a US bank in the syndicate. Failure to account for the endogeneity of the decision to hire a US bank vastly understates the magnitude of the effect. This finding has direct implications for the claim that US bank spreads for domestic IPOs are above competitive levels.