Why Don't U.S. Issuers Demand European Fees for IPOs?

Abstract

We compare fees charged by investment banks for conducting IPOs in the United States and Europe. In recent years, the "7% solution," as documented by Chen and Ritter (2000), has become even more prevalent in the United States, and is now the norm for IPOs raising up to $250 million. The same banks dominate both markets, but European IPO fees are roughly three percentage points lower, are much more variable, and have been falling. We review explanations for the gap in spreads and find the evidence consistent with strategic pricing. U.S. issuers could have saved over $1 billion a year by paying European fees.OVER 10 YEARS AGO, Chen and Ritter (2000) documented that IPO issuers in the United States almost always pay a gross spread of exactly 7% of proceeds to the underwriting syndicate for IPOs of between $20 million and $80 million. This evidence on the clustering of fees prompted an investigation by the U.S. Department of Justice, although this was ultimately dropped for lack of evidence of explicit collusion. A class-action antitrust lawsuit was also launched, and was settled privately after a 2007 appeals court decision allowing the claim against the underwriters to proceed. 1 Chen and Ritter cautioned that explicit collusion was unlikely, but concluded that the clustering of fees is consistent with implicit collusion-or "strategic pricing"-on the part of investment bankers. Subsequent papers by Hansen (2001) andTorstila (2003) argue against even implicit collusion. Hansen maintains that the U.S. IPO market is not unduly concentrated and that barriers to entry are low. Torstila points out that there is clustering of IPO fees outside the United States, but at lower levels, and argues that clustering need not be collusive. * Abrahamson, Jenkinson, and Jones are at the Saïd Business School, Oxford University. The authors thank the anonymous referee and the editor (Campbell Harvey) for many valuable comments and suggestions. We also thank the Centre for Corporate Reputation at the Saïd Business School, Oxford University for financial support for this research. 1 The original class-action lawsuit was filed in 1998, alleging fee-fixing by 32 underwriters, over the period 1994 to 1998. Most recently, the case has been pursued by two plaintiffs, one of which bought the right to bring a claim from a company that had conducted an IPO but then become bankrupt, and the other being a group of creditors of another company that had similarly gone public and then become bankrupt. In 2006, the District Court ruled that these plaintiffs were not qualified to pursue the case.In this paper, we first assess whether the "7% solution" still stands in U.S. IPOs. In other cases, where clustering of gross spreads has been identified by researchers, behavior has changed quickly. The findings of Christie, Harris, and Shultz (1994) that NASDAQ market makers systematically avoided setting quotes on the odd eighths were reported in national newspapers on May 25 and 26, 1994. The next day, the use of odd eighths increased sharply and effectiv...

CEOs and CFOs on IPOs: The Process and Success of Going Public

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“…1 Investigating the Italian underwriting market may be instructive, as its institutional setting is similar to most continental European countries, but significantly different from the US market (Abrahamson et al, 2011). In Europe, the price stabilization activity is never mandatory, can be done in the first month of trading and cannot be done above the offering price, as regulated by the Commission Regulation 2273/2003.…”

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