Are Initial Returns and Underwriting Spreads in Equity Issues Complements or Substitutes? |
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| Authors: | Dongcheol Kim Darius Palia Anthony Saunders |
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| Institution: | 1. Dongcheol Kim is a Professor of Finance at the Korea University Business School, Anan-dong, Seongbuk-gu, Seoul, Korea 1310701.;2. Darius Palia is the Thomas A. Renyi Chair in Banking in the Finance and Economics Department at Rutgers Business School-Newark and New Brunswick, Newark, NJ 07102.;3. Anthony Saunders is the John M. Schiff Professor of Finance at the Stern School of Business at New York University, New York, NY 10012. |
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| Abstract: | 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. |
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