A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

Abstract

We examine differences in underwriting costs between commercial bank Section 20 underwritten initial public offerings (IPOs) and investment-bank-underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial-bank-underwritten IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial-bank- and investment-bank-underwritten issues. Furthermore, we find that the long-run stock price performance for bank-underwritten issues is superior to that of investment-bank-underwritten issues. That is, lower underpricing for Section 20 underwritten issues may not be a short-run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial investment bank functions in one organization.

JEL Classification: G21, G24, G28