Abstract
One explanation provided for the relatively high and increasingly stable spreads for moderate-sized IPOs ($20–$80 million) documented in Chen and Ritter (J Finance 55:1105–1131, 2000) is that issuing firms focus less on price and more on a combination of investment bank-differentiating factors (such as underwriter prestige, analyst coverage, industry expertise, under-pricing, price stabilization activities, liquidity provision, and so on), and banks use industry-based differentiation as a source of market power. Using a new approach developed in a model of firm location choice due to Ellison and Glaeser (J Politi Econ 105:889–927, 1997), this paper presents some evidence on the combined relevance of such bank-differentiating factors, over and above bank size, for firms choosing investment banks for floating IPOs. For moderate-sized IPOs, there is a little, but not much evidence that such factors are a good explanation for high and increasingly stable spreads. Other than in a few of the largest industries, bank-differentiating factors are not significantly relevant for a large proportion of industries. Moreover, one aggregate measure of differentiation is declining over time.
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We are grateful to Preston McAfee for suggesting this approach to the problem, to Jay Ritter for providing an updated list of IPOs, and to Robert Anderson and anonymous referees for very helpful comments. We are grateful to seminar audiences at the University of Texas at Austin and Macalester College for helpful comments.
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Kulkarni, K.S., Sabarwal, T. To what extent are investment bank-differentiating factors relevant for firms floating moderate-sized IPOs?. Annals of Finance 3, 297–327 (2007). https://doi.org/10.1007/s10436-006-0054-y
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DOI: https://doi.org/10.1007/s10436-006-0054-y