Evidence of Early-Mover Advantages in Underwriting Spreads

I use a sample of 2370 public security offerings, comprising 64 financial security innovations and 4 traditional securities, to examine how investment banks are compensated for bearing underwriting risks related to new product development. I find strong evidence that underwriting fees decline as the innovation is widely adopted and competition enters the market, suggesting that underwriters be compensated for the additional risk associated with innovative securities. The data also reveal that underwriters seek greater compensation for security features that increase price volatility, which is consistent with the notion that underwriters value their position as a put option on the security. Finally, the inverse relationship between underwriting spreads and underwriter prestige suggests that larger, more reputable underwriters experience economies of scale.