Do Investment Banks Compete in Ipos?: The Advent of the '7% Plus Contract'

Posted: 14 Dec 2001

See all articles by Robert S. Hansen

Robert S. Hansen

Tulane University - A.B. Freeman School of Business


In the 1990s, over 85% of all initial public offerings (IPOs) in the US paid a 7% spread. Two hypotheses that may explain this convergence to 7% are one, that investment bankers colluded to profit from 7% IPOs or two, that the "7% contract" is an efficient innovative response the standard firm commitment contract is tailored to better conform to the IPO. This paper reports results of testing these two hypotheses. The collusion theory is not supported: there is low concentration and has been much entry in the IPO market. Further, a 7% spread is found to be less profitable than normal. Nor has it been used less frequently after it was made know that collusion allegations had been raised against the banks. Further evidence is consistent with efficient contract hypothesis. I find evidence consistent with competition among the banks in terms of reputation, placement abilities, and in the underpricing the IPOs.

Suggested Citation

Hansen, Robert S., Do Investment Banks Compete in Ipos?: The Advent of the '7% Plus Contract'. Journal of Financial Economics, Vol. 59, pp. 313-346, 2001; AFA 2001 New Orleans Meetings; EFA 2000 London. Available at SSRN:

Robert S. Hansen (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

Goldring/Woldenberg Hall
7 McAllister Blvd.
New Orleans, LA 70118
United States
504-865-5624 (Phone)

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information