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.
Description
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