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A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

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  • Paige Fields
  • Donald Fraser
  • Rahul Bhargava

Abstract

We examine differences in underwriting costs between commercial‐bank‐Section‐20‐underwritten initial public offerings (IPOs) and investment‐bank‐underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial bank IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial bank and investment bank issues. Furthermore, we find that the long‐run stock price performance for commercial bank issues is superior to that of investment bank issues. That is, lower underpricing for Section 20 issues may not be a short‐run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial and investment bank functions in one organization.

Suggested Citation

  • Paige Fields & Donald Fraser & Rahul Bhargava, 2003. "A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(4), pages 517-534, December.
    • Handle: RePEc:bla:jfnres:v:26:y:2003:i:4:p:517-534
    DOI: 10.1111/1475-6803.00072
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    References listed on IDEAS

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    1. Ber, Y. & Yafeh, Y. & Yosha, O., 1997. "Conflict of Interest in Universal Banking: Evidence from the Post-Issue performance of IPO Firms," Papers 18-97, Tel Aviv.
    2. Hedva Ber & Yishay Yafeh & Oved Yosha, 1997. "Conflict of Interest in Universal Banking: Evidence from the Post-­Issue Performance of IPO Firms," Bank of Israel Working Papers 1997.05, Bank of Israel.
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    Cited by:

    1. Wolfgang Bessler & Andreas Kurth, 2007. "Agency Problems and the Performance of Venture-backed IPOs in Germany: Exit Strategies, Lock-up Periods, and Bank Ownership," The European Journal of Finance, Taylor & Francis Journals, vol. 13(1), pages 29-63.

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