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A third very common characteristic used as a control variable is a measure of firm
size, usually measured by firm book value of assets, market value of assets, equity mar-
ket value (measured by book market value or debt plus equity market value), or firm
annual sales. Firm size is generally interpreted as capturing asset diversification and the
quality of publicly available information about the firm. These three characteristics are
frequently used as control variables in this stream of literature examining underwriter
spreads.
Two well cited studies of IPO underwriting spreadsChen and Ritter (2000)and
Hansen (2001)document that these spreads strongly cluster at 7 percent, especially in
the 1990s. However, in selecting their sample, Chen and Ritter exclude very large and
very small issues where other levels of underwriting fees would most likely be observed.
They interpret this as evidence that the market for underwriting services is oligopolis-
tic.Hansen (2001)re-examines IPO underpricing without excluding relatively large
and small issues and finds much greater variability in underwriting spreads. He also
presents other evidence supporting the existence of a competitive underwriting mar-
ket. More recently,Mullineaux and Roten (2005)compare IPO underwriting spreads by
commercial banks and investment banks and find that commercial bank underwriters
tend to be more concentrated at 7% than investment bank underwriters.Kim, Palia, and
Saunders (2005b)examine trends in IPO and SEO underwriter spreads over the 1970–
2004 period. They find evidence of a fall in IPO spreads over the 1990–2004 period,
but no evidence of a change in SEO spreads, which is weak support for an increase in
competition in the underwriting market.
In most studies of underwriter spreads, researchers take a particular focus, usually
investigating an economic determinant of spreads that is not well documented in the
literature, while controlling for other offering characteristics previously shown to affect
spreads. For example,Kim, Palia, and Saunders (2005a)jointly study IPO underwriter
spreads and underpricing, with particular focus on the interrelationship of underwriter
spreads and underpricing. They argue that underpricing can be viewed as an additional
form of compensation, which underwriters can capture through their power to allocate
offers to favored customers. They find that IPO underwriter spread is positively related
to IPO underpricing, a missing financial statement indicator and the inverse of the log
of offer size and negatively related to the underwriter having a star analyst and issuer
return volatility.
Turning to SEOs,Smith (1977)reports on direct flotation cost components classi-
fied by flotation method and offer size and scaled by gross proceeds. He calculates the
mean values of both underwriter fees and other expenses across three major flotation
methods; namely firm commitments, rights offers and standby offers. Smith finds that
underwriter spreads average 5 percent of the offer price for firm commitments and that
they range from over 10 percent for small issues to under 4 percent for very large is-
sues.
Eckbo and Masulis (1992)study SEO underwriter spreads and flotation methods for
industrials and utility issuers listed on NYSE and AMEX for nearly a 20 year period.
They report underwriter fees and other flotation costs by flotation method and confirm