Equity Underwriting Spreads at Commercial Bank Holding Companies and Investment Banks
41 Pages Posted: 30 Mar 2001
Date Written: December 2000
This paper focuses on relative equity issue costs at commercial bank-affiliated and investment bank underwriters over the period 1995-99. We estimate models for the gross spreads associated with both IPOs and SEOs, but disaggregate the sample by type of underwriter. Our methods are driven by theoretical arguments that bank-related underwriters could have certain competitive advantages relative to investment banks in securities underwriting. We find some distinctive differences among the factors influencing gross spreads at the commercial bank-affiliated underwriters relative to investment banks, primarily in the set of variables we identify with the certification role of underwriters. The IPO gross spreads at Section 20 underwriters are less sensitive to scale economies, reputation, uncertainty, third-party monitoring, and pricing performance. The differences are consistent with theories that suggest that commercial bank organizations possess unique technologies for managing information and/or that Section 20 firms can exploit diversification benefits from BHC affiliation. This interpretation is strengthened by the lack of significant differences in SEO underwriter spreads. The relative advantage that Section 20s possess in monitoring capabilities or technologies for managing information problems appear to be irrelevant when information is readily and cheaply available. The observed results are also consistent with Hansen's (2000) argument that underwriters compete for business on several different dimensions.
Keywords: Equity, underwriting, Section 20, investment banks, IPO
JEL Classification: G0, G2
Suggested Citation: Suggested Citation