Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors.

Abstract:     
We examine the costs and benefits of the global integration of primary equity markets associated with the parallel diffusion of U.S. underwriting methods. We analyze both direct and indirect costs (associated with underpricing) using a unique dataset of 2,132 IPOs by non-U.S. issuers from 65 countries in 1992-1999. Bookbuilding typically costs twice as much as a fixed-price offer, but on its own, does not lead to lower underpricing. However, when conducted by U.S. banks and/or targeted at U.S. investors, bookbuilding can reduce underpricing significantly,relative to fixed-price offerings or bookbuilding efforts conducted by local banks. These results are obtained after allowing for the endogeneity and interdependence of issuers choices. For the great majority of issuers, thegains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the U.S. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter [Journal of Finance 55, 200], particularly since non-U.S. issuers raising US$20m-80m also typically pay a 7%spread when U.S. banks and investors are involved.

Number of Pages in PDF File: 43

Keywords: Initial public offerings, bookbuilding, underwriting spreads, market integration

working papers series