IPO Spreads: You Get What You Pay for
20 Pages Posted: 13 Jul 2000
Date Written: June 15, 2000
Chen and Ritter (2000) show that it is customary in the investment banking industry to charge a gross spread of seven percent for underwriting a moderately-sized firm-commitment initial public offering. However, in a nontrivial number of IPOs, the spread differs from this standard. We examine the effect on offering price of a negotiated spread that differs from seven percent. Negotiations that yield lower (higher) underwriting fees are associated with lower (higher) IPO offering prices on average, indicating marketing efforts expended by investment banks reflect the amounts paid to them.
Keywords: Investment banking, initial public offering, underwriter fees
JEL Classification: G24, G32
Suggested Citation: Suggested Citation