Competition in IPO Underwriting: Time Series Evidence

Abstract

Almost all recent US firm commitment IPOs between $20 million and $80 million in proceeds have been charged an underwriting spread of exactly 7%, while in the early 1980s only 25% of IPOs faced such clustering at exactly 7% [Chen and Ritter (2000)]. Such clustering, or specifically, the apparent lack of relationship between issue size and spread has been attributed to implicit collusion or nonprice competition. Our time series evidence reveals that the median size of an IPO has tripled in the last two decades and recent IPOs have involved considerably more risky firms. We also find that smaller IPOs tend to be riskier and underwriting spreads tend to be higher and more clustered for riskier IPOs. Therefore, given the changes in size and risk of IPOs over the last two decades, pooled data can mask evidence of competition in the market. We find that spreads were clustered even in earlier periods, and more signficantly, such clustering was at levels greater than 7%. Over time, clustering at 7% has increased as clustering above 7% has declined. IPO spreads have declined significantly over time as the firms going public are now riskier, underwriting efforts have increased and IPO are much larger today than in the past. Controlling for time trends, larger IPOs have lower average spreads. The market for underwriting IPOs seems to be competitive with entry of new firms during the hot markets.

Keywords: IPOs, Underwriting spreads, Competitiveness of IPO underwriting

JEL Classification: G0, G2, K0, L0