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The Seven Percent Solution? An International Perspective on Underwriting Spreads

Alexander P. Ljungqvist, William J. Wilhelm


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.

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