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On Excess Compensation Earned by Underwriters in Firm Commitment Initial Public Offerings of Common Stock: An Empirical Analysis

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Listed:
  • Daniel P. Klein

    (Bowling Green State University)

  • R. Corwin Grube

    (Drake University)

  • O. Maurice Joy

    (University of Kansas)

Abstract

This paper examines compensation for the underwriting activity in firm commitment initial public offerings (IPOs) of common stock in the U.S. When compensation for origination, management and marketing efforts are excluded from total underwriter compensation, we find that the portion of the total compensation assigned for the underwriting activity itself exceeds theoretical compensation only for issues that sell out very quickly. We interpret this finding as empirical evidence supporting the incentive for underwriters to underprice IPOs. Finally, we find excess compensation to underwriters is positively related to the riskiness of the IPO and negatively related to the degree of competition among investment bankers and the size of the IPO.

Suggested Citation

  • Daniel P. Klein & R. Corwin Grube & O. Maurice Joy, 1992. "On Excess Compensation Earned by Underwriters in Firm Commitment Initial Public Offerings of Common Stock: An Empirical Analysis," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 2(1), pages 53-69, Fall.
    • Handle: RePEc:pep:journl:v:2:y:1992:i:1:p:53-69
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Excess Compensation; Compensation; Underwriter; Firm Commitment; IPO;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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