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

Lowery, Richard, Imperfect Monitoring and Fixed Spreads in the Market for IPOs (November 27, 2009). Available at SSRN: https://ssrn.com/abstract=1514597 or http://dx.doi.org/10.2139/ssrn.1514597

Richard Lowery (Contact Author)

University of Texas-Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States