The seven percent solution? An international perspective on underwriting spreads

Working paper

Non-U.S. firms frequently pay a substantial premium to have a U.S. bank lead their initial public offering of equity, even when the issuing firm is not seeking a listing on a U.S. exchange. We provide evidence that this decision reflects an expectation that U.S. banks deliver a higher quality bundle of underwriting services. Specifically, a non-U.S. issuing firm that includes a U.S. bank in its underwriting syndicate can expect to have its offering underpriced by 17.7 percentage points less than had it not included a U.S. bank in the syndicate. Failure to account for the endogeneity of the decision to hire a U.S. bank vastly understates the magnitude of the effect. This finding has direct implications for the claim that U.S. bank spreads for domestic IPOs are above competitive levels.

Authors: Wilhelm, W; Ljungqvist, A

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 1999-11-01
• Paper number: 1999-FE-11
• Keywords: initial public offerings; underwriting spreads; investment banking