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Are Initial Returns and Underwriting Spreads in Equity Issues Complements or Substitutes?
Author(s) -
Kim Dongcheol,
Palia Darius,
Saunders Anthony
Publication year - 2010
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2010.01117.x
Subject(s) - underwriting , issuer , equity (law) , business , economics , monetary economics , financial economics , actuarial science , econometrics , finance , political science , law
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.