To what extent are investment bank-differentiating factors relevant for firms floating moderate-sized IPOs?

Kedar S. Kulkarni and Tarun Sabarwal

Finance from University Library of Munich, Germany

Abstract: One explanation provided for the relatively high and increasingly stable spreads for moderate-sized IPOs ($20-$80 million) documented in Chen and Ritter (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 (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.

Keywords: Investment Banking; Initial Public Offering; Differentiating Factors; Concentration; 7 percent puzzle (search for similar items in EconPapers)
JEL-codes: G24 G31 L11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-10-05, Revised 2005-12-01
New Economics Papers: this item is included in nep-cfn
Note: Type of Document - pdf; pages: 31
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Journal Article: To what extent are investment bank-differentiating factors relevant for firms floating moderate-sized IPOs? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0410005

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