Open AccessDoes the Gross Spread Compensate Lead Underwriters for Analyst Coverage?
Author(s) -
Cheolwoo Lee
Publication year - 2012
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v1n2p36
Subject(s) - underwriting , syndicate , initial public offering , business , revenue , investment banking , investment (military) , premise , compensation (psychology) , accounting , monetary economics , finance , economics , psychology , linguistics , philosophy , politics , political science , psychoanalysis , law
Since underpricing and gross spread are the two main revenue sources for investment banks in public offerings and Cliff and Denis (2004) find that underpricing is used to compensate analyst coverage, this paper examines the IPO syndicate data to investigate whether the gross spread compensates investment banks for analyst coverage. We find evidence to support the premise that the gross spread is used to compensate lead underwriters for analyst coverage when the lead underwriter has a strong bargaining power to advantageously shape up the compensation structure. After accounting for several critical issues, our results remain unchanged.