The Seven Percent Solution

Hsuan‐Chi Chen and Jay Ritter

Journal of Finance, 2000, vol. 55, issue 3, 1105-1131

Abstract: 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.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:55:y:2000:i:3:p:1105-1131

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