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 IPO markets associated with the diffusion of U.S. underwriting methods in the 1990s. Bookbuilding is becoming increasingly popular outside the U.S. and typically costs twice as much as a fixed-price offer. However, on its own bookbuilding only leads to lower underpricing when conducted by U.S. banks and/or targeted at U.S. investors. For most issuers, the gains 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], particularly since non-U.S. issuers raising USS20m-80m also typically pay a 7% spread when U.S. banks and investors are involved.

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

JEL Classifications: G32

Working Paper Series