Are there economies of scale in underwriting fees? Evidence of rising external financing costs

This study examines the behavior of spreads paid in firm underwrittenseasoned common stock offerings and straight bond offerings.Estimates indicate that up to 85% of the spread is variablecost and that the marginal spread is rising. Further, offeringsthat are likely to require greater underwriting services encounterhigher marginal spreads. These findings are consistent withthere being a family of U-shaped spreads, with lower qualityofferings priced on higher spreads, unlike the economies ofscale view of spreads. They agree with the views that underwritersprovide valuable services and that the marginal cost of externalfinance is rising.