We thank Robert Engle, Robert Hansen, Alexander Ljungqvist, Eli Ofek, Jay Ritter, and especially Bill Christie (editor) and an anonymous referee for helpful comments. We appreciate the editorial comments of Anjolein Schmeit and Wendy Jennings. We also thank Victoria Ivashina, Tae-Nyun Kim, Xiawei Liu, Robert Porter, Jun Wang, and Wei Yu for data collection assistance. The second author thanks the Whitcomb Center and the Thomas A. Renyi Chair in Banking at Rutgers Business School for partial financial support. All errors remain our responsibility.
Are Initial Returns and Underwriting Spreads in Equity Issues Complements or Substitutes?
Article first published online: 6 DEC 2010
© 2010 Financial Management Association International
Volume 39, Issue 4, pages 1403–1423, Winter 2010
How to Cite
Kim, D., Palia, D. and Saunders, A. (2010), Are Initial Returns and Underwriting Spreads in Equity Issues Complements or Substitutes?. Financial Management, 39: 1403–1423. doi: 10.1111/j.1755-053X.2010.01117.x
- Issue published online: 6 DEC 2010
- Article first published online: 6 DEC 2010
The objective of this paper is to analyze the joint behavior of underwriting spreads and initial returns on equity issues for a large sample of issues over a 21-year period. Traditional empirical approaches to the determination of these direct and indirect issuing costs view them as independent. Using a three-stage least squares approach, we find these costs to be positively and significantly related. In the case of seasoned equity offerings, our results are robust to replacing initial returns with the offer price discount. We also find that low quality issuers are charged higher underwriting spreads and initial returns when compared to high quality issuers.