Imperfect Monitoring and Fixed Spreads in the Market for IPOs
64 Pages Posted: 28 Nov 2009 Last revised: 19 Dec 2009
Date Written: November 27, 2009
Abstract
Characteristics of the investment banking industry, particularly the extreme concentration of spreads at exactly 7%, seem consistent with some form of collusion through which underwriters can extract surplus from the IPO. I present a model of investment banking that, under the assumption of optimal collusion, generates a distribution of spreads similar to that observed. The model is extended to show that underpricing and spread rigidity may arise together, each one reinforcing incentives to engage in the other.
Keywords: IPOs, repeated games, imperfect monitoring
JEL Classification: D43, G24
Suggested Citation: Suggested Citation
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