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The Seven Percent Solution? An International Perspective on Underwriting Spreads

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  • William Wilhelm
  • Alexander Ljungqvist

Abstract

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.

Suggested Citation

  • William Wilhelm & Alexander Ljungqvist, 1999. "The Seven Percent Solution? An International Perspective on Underwriting Spreads," Economics Series Working Papers 1999-FE-11, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:1999-fe-11
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    Cited by:

    1. Jenkinson, Tim & Ljungqvist, Alexander & Wilhelm Jr, William J, 2000. "Has the Introduction of Bookbuilding Increased the Efficiency of International IPOs?," CEPR Discussion Papers 2484, C.E.P.R. Discussion Papers.
    2. Diro Ejara, Demissew & Ghosh, Chinmoy, 2004. "Underpricing and aftermarket performance of American depositary receipts (ADR) IPOs," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3151-3186, December.
    3. Kedar Kulkarni & Tarun Sabarwal, 2007. "To what extent are investment bank-differentiating factors relevant for firms floating moderate-sized IPOs?," Annals of Finance, Springer, vol. 3(3), pages 297-327, July.
    4. Jean-Marc Suret & Maher Kooli, 2002. "How cost-effective are Canadian IPO markets?," CIRANO Working Papers 2002s-83, CIRANO.
    5. Stolpe, Michael, 2004. "Europe's entry into the venture capital business: efficiency and policy," Kiel Working Papers 1223, Kiel Institute for the World Economy (IfW Kiel).
    6. Joel A. C. Baum & Bill McEvily & Tim J. Rowley, 2012. "Better with Age? Tie Longevity and the Performance Implications of Bridging and Closure," Organization Science, INFORMS, vol. 23(2), pages 529-546, April.
    7. Stolpe, Michael, 2003. "Learning and signalling in the French and German venture capital industries," Kiel Working Papers 1156, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    Initial public offerings; investment banking; underwriting spreads;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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