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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