The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Seven Percent Solution
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00242
Hsuan‐Chi Chen, Jay R. Ritter
Gross spreads received by underwriters on initial public offerings (IPOs) in the United States are much higher than in other countries. Furthermore, in recent years more than 90 percent of deals raising $20–80 million have spreads of exactly seven 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.