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Is Underwriter Retention of IPO Shares a Good Substitute for Underwriting Spreads?

Author

Listed:
  • Anlin Chen
  • Yu Ting Urania Huang
  • Lanfeng Kao
  • Cheng Shou Lu

Abstract

In Taiwan, underwriters are required to retain at least 10 percent but no more than 25 percent of underwritten initial public offering (IPO) shares and sell the remainder to the public. We find that IPO underpricing causes underwriters to retain more shares to earn capital gains on retained shares and that underwriter retention is a signal of IPO underpricing. If underwriter retention is cancelled, underwriters need to be compensated through lottery draw processing fees or underwriting spreads. We show that issuers should compensate underwriters through underwriting spreads directly, rather than indirectly through underwriter retention or lottery draw processing fees.

Suggested Citation

  • Anlin Chen & Yu Ting Urania Huang & Lanfeng Kao & Cheng Shou Lu, 2009. "Is Underwriter Retention of IPO Shares a Good Substitute for Underwriting Spreads?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(5), pages 19-30, September.
    • Handle: RePEc:mes:emfitr:v:45:y:2009:i:5:p:19-30
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