One explanation provided for the relatively high and increasingly stable spreads for moderate-sized IPOs ($20-$80 million) documented in Chen and Ritter (2000) is that issuing firms focus less on price and more on a combination of investment bank-differentiating factors (such as underwriter prestige, analyst coverage, industry expertise, under-pricing, price stabilization activities, liquidity provision, and so on,) and banks use industry-based differentiation as a source of market power. Using a new approach developed in a model of firm location choice due to Ellison and Glaeser (1997), this paper presents some evidence on the combined relevance of such bank-differentiating factors, over and above bank size, for firms choosing investment banks for floating IPOs. For moderate-sized IPOs, there is a little, but not much evidence that such factors are a good explanation for high and increasingly stable spreads. Other than in a few of the largest industries, bank-differentiating factors are not significantly relevant for a large proportion of industries. Moreover, one aggregate measure of differentiation is declining over time.
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Paper provided by EconWPA in its series Finance with number
0410005.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Hsuan-Chi Chen & Jay R. Ritter, 2000.
"The Seven Percent Solution,"
Journal of Finance,
American Finance Association, vol. 55(3), pages 1105-1131, 06.
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