1998) and to lower underwriting spreads
and offering yields for nonconvertible debt issues (Miles and Miller, 2000).
It would be irrational for issuers to increase their underwriting spreads just to get another 20 percent of their issue into retail investors' hands at the same wholesale interest rates.
Market competition has allowed issuers to compress the underwriting spread on their deals so low that broker-dealers are pricing primary deals at a wholesale level and thus selling almost exclusively to wholesale buyers.
A 5 percent underwriting spread will generate a $25 commission for the retail broker handling the $5,000 block for a retail investor.
Little money can be made as a co-manager in the current market because underwriting spreads
are usually so slim.
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.
This paper uses a simultaneous equations model in which underwriting spreads (direct costs) and underpricing (indirect costs) are allowed to be jointly determined for both IPOs and SEOs.
Erdman's hero quickly realizes that rating fees and municipal underwriting spreads
offer little opportunity for a return to the high profit margins of his leveraged-buyout days.
Therefore, the equity issues of higher management quality firms will have more reputable underwriters, smaller underwriting spreads, and other expenses, and smaller SEO discounts.
Third, we find that SEO firms with better and more reputable managements are associated with lower underwriting spreads.
Investor options reduce underwriter inventory risk, while they simultaneously increase information costs, which makes their effect on underwriting spreads uncertain; therefore it can be approached only through empirical testing.
Empirical tests, after controlling for issue size and risk, demonstrate that underwriting spreads are significantly higher than regular bonds for bonds with complex structure or tax treatment.