Global Integration in Primary Equity Markets: The Role
of U.S. Banks and U.S. Investors
Ljungqvist, Tim Jenkinson, William Wilhelm
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.
published in the Review of Financial Studies 2003 16
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