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Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors

Author

Listed:
  • Alexander Ljungqvist
  • Tim Jenkinson

    ()

  • William Wilhelm

    ()

Abstract

We examine the costs and benefits of the global integration of primary equity markets associated with the parallel diffusion of U.S. underwriting methods. We analyze both direct and indirect costs (associated with underpricing) using a unique dataset of 2,143 IPOs by non-U.S. issuers from 65 countries in 1992-1999. Bookbuilding typically costs twice as much as a fixed-price offer, but on its own, does not lead to lower underpricing. However, when conducted by U.S. banks and/or targeted at U.S. investors, bookbuilding can reduce underpricing significantly, relative to fixed-price offerings or bookbuilding efforts conducted by 'local' banks. Compared to estimates of the benefit of secondary-market integration, the effects we find are substantially larger. These results are obtained after allowing for the endogeneity and interdependence of issuers' choices. For the great majority of issuers, the gains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the U.S. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter [Journal of Finance 55, 2000], particularly since non-U.S. issuers raising US$20m-80m also typically pay a 7% spread when U.S. banks and investors are involved.

Suggested Citation

  • Alexander Ljungqvist & Tim Jenkinson & William Wilhelm, 2001. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," OFRC Working Papers Series 2001fe06, Oxford Financial Research Centre.
  • Handle: RePEc:sbs:wpsefe:2001fe06
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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