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The Seven Percent Solution

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  • Hsuan-Chi Chen

    (Fu Jen University, Taiwan,)

  • Jay R. Ritter

    (Ritter is from the University of Florida)

Abstract

Gross spreads received by underwriters on initial public offerings (IPOs) in the United States are much higher than in other countries. Furthermore, in recent years more than 90 percent of deals raising $20-80 million have spreads of exactly seven percent, three times the proportion of a decade earlier. Investment bankers readily admit that the IPO business is very profitable, and that they avoid competing on fees because they 'don't want to turn it into a commodity business.' We examine several features of the IPO underwriting business that result in a market structure where spreads are high. Copyright The American Finance Association 2000.

Suggested Citation

  • Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
  • Handle: RePEc:bla:jfinan:v:55:y:2000:i:3:p:1105-1131
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