The Seven Percent Solution
Hsuan-Chi Chen
chenh@chip.cba.ufl.edu
and
Jay R. Ritter
jay.ritter@cba.ufl.edu
(352) 846-2837
http://bear.cba.ufl.edu/ritter/index.html
Department of Finance, Insurance and Real Estate
University of Florida
Gainesville FL 32611-7168
May 1999
Forthcoming, Journal of Finance
Abstract
Gross spreads received by underwriters on initial public offerings (IPOs) in the U.S. are much higher than in other countries. Furthermore, in recent years at least 90 percent of deals raising between $20-80 million have spreads of exactly 7.0 percent, three times the proportion of a decade earlier. Investment bankers readily admit that the IPO business is very profitable, and that they avoid competing on fees because they "don’t want to turn it into a commodity business." We examine several features of the IPO underwriting business that result in a market structure where spreads are high.
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