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Department of Justice investigation of collusion allegations following the release of the
Chen and Ritter (2000)findings.Hansen (2001)also reports that measures of concentra-
tion in the IPO market are well below the level considered by the Department of Justice
to be anticompetitive. He notes that underwriters compete in many dimensions in addi-
tion to underwriter spreads, so that convergence to a common spread like 7 percent is
not strong evidence of anticompetitive behavior.
Dunbar (2000)studies market share changes of book managers of IPOs and finds that
they are negatively related to IPO first day returns and underwriter compensation (fees)
and positively with analyst reputation.^17 This suggests that underwriters are competing
implicitly, if not explicitly, on the level of IPO underpricing and underwriter spreads,
contrary to the popular notion that banks do not cut fees to attract business.Corwin
(2003)finds that seasoned offers were underpriced by an average of 2.2 percent dur-
ing the 1980s and 1990s, with the discount increasing substantially over time, and that
underpricing is significantly related to underwriter pricing conventions such as price
rounding and pricing relative to the bid quote.Mola and Loughran (2004)also docu-
ments the increased usage of price rounding in setting SEO offer prices. These results
appear to suggest a weakening in underwriter competition.
Adding to this debate,Burch, Nanda, and Warther (2005)examine underwriting fees
of repeat security issuers to determine the relation between loyalty to a bank underwriter
and the fees charged. They find that loyalty is associated with lower fees for common
stock offers, but higher fees for debt offers. For both offer types, firms that graduate to
higher ranked banks face lower fees. They also show that firms, which tend to switch
banks to improve analyst coverage, pay higher fees in common stock offers, but do not
pay higher fees in debt offers.
In contrast to this evidence,Ellis, Michaely, and O’Hara (2004)report that while
many firms “graduate” to better underwriters, most firms move laterally or are down-
graded in terms of lead underwriter ranking. They show that firms that graduate to a
higher ranked underwriter must pay a premium for the privilege (i.e., above the fee
charged by the same underwriter to an existing client for a similar deal), and, simi-
larly, firms that use a lower ranked underwriter for their equity offering must also pay a
premium.
Krigman, Shaw, and Womack (2001)studies underwriter selection in IPOs and finds
that the quality of the analyst team is a key factor in underwriter selection. They also
find that better performing IPO firms often switch to higher ranked underwriters for
their SEOs. In addition, they conducted a field-based survey of chief financial officers
(CFOs) and chief executive officers (CEOs) of IPO firms, who later switched under-
writers, as to which factors were most important to their underwriter selections. Their
survey reveals that the most important factors for issuers’ senior management in select-
ing a lead underwriter are underwriters’ and analysts’ reputations, with issue pricing
(^17) Interestingly,Dunbar (2000)also finds that banks lose market share if they are associated with overpriced
IPOs, consistent withBooth and Smith (1986)’s certification theory.