آیا بانک های سرمایه گذاری در IPOs به رقابت می پردازند ؟ ظهور "7٪ به همراه قرارداد"

The large number of initial public offerings (IPOs) with a 7% spread suggests either that investment bankers collude to profit from 7% IPOs or that the 7% contract is an efficient innovation that better suits the IPO. My tests do not support the collusion theory. Low concentration and ease of entry characterize the IPO market. Moreover, the 7% spread is not abnormally profitable, nor has its use been diminished by public awareness of collusion allegations. In support of the efficient contract theory, banks compete in pricing 7% IPOs on the basis of reputation, placement service, and underpricing.

The frequency with which a 7% spread is used in initial public offerings (IPOs) has risen dramatically, from six in 1981 to hundreds per year in the 1990s. A spread is the underwriting syndicate's fee as a percentage of the proceeds. In this paper I empirically investigate two theories for the convergence on 7%. The cartel theory asserts that there is collusion in the IPO market to maximize profit from the 7% spread. The efficient contract theory asserts that the 7% IPO is the survivor of competition that determines the fittest IPO contract. To date, there are no empirical tests of either theory. Theoretically, collusion in the IPO market will be either explicit or implicit, both of which require the expected gains from continuing to charge 7% to exceed the gains expected from defection. In explicit collusion, many employees from several banks jointly agree to fix the spread at 7%. Chen and Ritter (2000) favor implicit collusion by independent bankers. Their paper has inspired a class action lawsuit against 27 banks for not competing on price, as well as a U.S. Department of Justice investigation of “alleged conspiracy among securities underwriters to fix underwriting fees”.1 They relate their claim to the Christie and Schultz (1994) claim of implicit collusion among dealers to avoid odd-eighth bid–ask spreads for Nasdaq stocks, and the stunning evidence in Christie et al. (1994) of a significant drop in bid–ask spreads when that collusion claim became public. They rely on Chen (1999), who adapts Dutta and Madhavan's (1997) model of implicit collusion among dealers to apply it to IPO investment bankers. Empirically distinguishing between the two types of collusion can be problematic because they often produce observationally similar outcomes. My tests focus on establishing whether collusion can be rejected or whether competition can be rejected. If these tests, which are often independent, reveal evidence of collusion, then more testing could be called for to determine the collusion type. However, if the tests do not show evidence of collusion, then the distinction between explicit and implicit collusion is immaterial. In general, the tests in this study do not reveal evidence of collusion. Under the survivorship principal, in a competitive market a contract's survival implies that it is efficient (Alchian, 1950; Stigler, 1958). For example, Smith and Warner (1979) discus the survival of bond covenants and argue that their current forms succeed because they are an efficient contractual solution for the firm. In IPO contracts, the important competition takes place between the lead banks (i.e., syndicate managers and co-managers) that provide certification services. The IPO contract has multiple dimensions, including underpricing and certification and marketing services, so limiting the spread is not evidence of anticompetitive price setting because competition will decide the contract's price in its other dimensions. If the level of certification and marketing would require a spread above 7%, then higher underpricing can lessen the underwriter's placement burden and bring the contract to a 7% equivalent. Or, to hire a more-reputable bank, the issuer can lower the offer price until the IPO is underpriced and investor interest is increased enough to square the underwriter's reputation exposure with 7%. Because underpricing substitutes for placement effort and reputation, the pricing of the 7% contract is perhaps best perceived as “7% plus” negotiated underpricing. The survivorship principal also implies that the 7% contract has an economic edge in serving IPOs. I suggest three possible advantages. One is that a 7% spread narrows informational externalities spawned by the large ex ante error in valuing speculative IPO firms.2 A spread's gap from what was expected could raise suspicions about firm value and underwriter veracity. Investors will discount the speculative firm more deeply if they suspect that an unexpected narrow spread signals a charade to inspire overvaluation, or that overvaluation is signaled by an unexpected generous spread. A uniform spread across IPOs limits doubt about what underwriter compensation is going to be. Less ex ante suspicion about underwriter veracity can, in turn, lower underwriter and management exposure to ex post lawsuits claiming deliberate misvaluation. A second possible benefit is reduced moral hazard. The verifiability of underwriter placement effort is impaired by a large IPO valuation error. With costly collective monitoring, underwriters will be more inclined to respond to a declining spread, as occurs in non-7% IPOs, as a penalty for the costly search for a higher price. A flat spread provides a simple ex ante delegated monitoring mechanism that encourages search, raising value. Williams (1998) provides a competitive equilibrium model in which a fixed spread commission across all brokers and clients minimizes their agency problems, to explain the constant 6% broker contract in U.S. residential housing markets. The third possible advantage of a fixed spread is lower contracting costs. In a traditional seasoned equity offering (SEO) contract, the spread is negotiated jointly with the overallotment option inclusion decision, the proceeds amount, and the offer price, all of which share entangled relations with common determinants (see Hansen, 1986). In the case of IPOs, the negotiations are further complicated by the overhanging uncertainty about the market price of the firm's stock. The 7% contract helps simplify this more complex contracting environment by reducing both the number of items to negotiate and redundant haggling. Ball et al. (1985) argue that to lower transaction costs, volatile common stocks are often quoted at rounded wide price intervals, such as 1/2, rather than 1/4 or 3/4, and are even less likely to be quoted at 3/8 or 5/8, etc. How might competition bring about convergence on 7%? Because the spread plus underpricing generally exceeds 15% (Carter et al., 1998), there are sustainable spreads other than 7%. The convergence on the 7% might be a convention, initiated by a fortuitous abnormal use, or by its strong allure, at the time when IPO volume began to expand. Alternatively, the convergence could be a practical conceit. If a constant spread improves IPO contracting then the level that would be settled upon in a business setting will probably be the most agreeably reasonable number. A most agreeable number is the mean spread in non-7% IPOs, which is near 7%, which after rounding makes 7% a strong focal point. Other innovations have succeeded in reducing firm commitment contracting costs. One surviving innovation is the overallotment option, which gives the underwriter the right to sell up to an additional 15% of the offering. The added flexibility reduces underwriter losses from a mismatch of post-offer sales with pre-offer indications of interest, thus lowering marketing cost and the spread (Hansen et al., 1987). The option is now used widely in IPOs and SEOs. Another survivor is the supplementing of underwriter compensation with warrants representing a claim on the issuer's upside equity value. Linking compensation to future stock price performance helps ease investor suspicion of underwriter veracity and placement effort, thereby lowering certification costs and the spread. Dunbar (1995) finds that the use of warrants lowers the spread. Among unsuccessful innovation attempts are the use of competitive bidding to award the firm commitment contract (Hansen and Khanna, 1994) and the use of the shelf procedure (Denis, 1991). At the theoretical level, a lack of evidence of IPO collusion suggests that investment banking lacks the conditions that make collusion profitable and possible. One unmet precondition could be sufficient enforcement to assure enduring collusion among all banks. In explicit collusion, the threats and punishments that are required to control cheating in charging spreads and sharing of profits might be too costly to sustain. Perhaps their discovery by authorities would be too easy or they are likely to invite lethal legal reprisal from opportunistic opponent banks. In implicit collusion, which by definition cannot have explicit enforcement, the requirements of spread observability and independent behavior, to include autonomous profiting, might not be possible. Though Chen and Ritter (2000) suggest that reporting 7% on the prospectus assures observability, this is noisy observability at best since actual spreads can differ from reported spreads. For example, lead banks could grant secret concessions to issuers within reciprocal agreements. Independence is problematic for two reasons. First, setting the spread is often the result of explicit group decision making among bankers in the lead bank and the other banks. Second, results reported later contradict independent profiting. Nor is there an obvious external source of authority that might hold a cartel together for so long. Another unmet precondition could be that expected losses from large fines and damage to individual careers and to banks’ solid reputations are not too severe. For example, in a plausible model of implicit collusion among independent bankers, 7% might not be enough to cover each banker's losses from career damage following discovery of the collusion by control persons inside the bank.3Chen's (1999) model assumes noiseless spread observability, that underwriting contracts are rendered by independent individual bankers (not by banks of interdependent bankers) of like economic size and market share, who are unconcerned with excessive fines and damage to careers or bank reputation. My investigation has three phases. The first phase presents evidence from four tests that focus on market structure, collusion, and profit. Two tests examine whether IPO market structure is consistent with monopoly or competition. The first test examines concentration in the IPO market. Collusion is typically allied with a highly concentrated market. Dutta and Madhavan (1997) note that this is not so in their implicit collusion model because their dealers are the same size with the same market share. However, these same-size assumptions are too unrealistic for investment banks (for example, in March 1999 equity market value, Morgan Stanley was ten times bigger than Bear Stearns and 75 times bigger than Hambrecht and Quist). The second test investigates entry into the IPO market, which typically must be deterred for both explicit and implicit collusion. The evidence indicates low and unchanging concentration and a high degree of entry over the 7% era, contrary to collusion. In the third test, I apply to IPOs the Christie et al. (1994) experiment for Nasdaq dealer collusion. Use of 7% does not decline after the collusion allegation probe is announced. The fourth test examines whether 7% is a profitable spread. My benchmark spread is based on a fitted model of spreads paid in non-7% IPOs by U.S. firms. Using those estimated coefficients, the 7% spreads are, if anything, too low to contain abnormal profit. These findings argue against collusion of either type. Chen and Ritter (2000) argue that 7% is profitable since it is above the spreads paid in foreign IPOs. However, that benchmark does not take other considerations into account, such as the dimensions of the IPO contract, underwriter quality, and legal and other institutional differences between U.S. and foreign primary markets. None of the above findings reject the hypothesis that the IPO market is competitive, as required for efficient contracting. In the second phase I report findings from tests of implications drawn from the efficient contract theory. Logistic regression estimates indicate that firms going public through 7% IPOs are more difficult to value, and they use more-reputable underwriters. They also have significantly higher underpricing. Tobit regressions show that their underpricing is greater when they are more difficult to value and when they hire more-reputable banks. In contrast, non-7% IPO underpricing shows less sensitivity to these characteristics. More 7% contract price variation in the underpricing is consistent with efficient contracting. Overall, these results are consistent with lead banks competing in 7% IPOs on the basis of their reputations, underpricing, and placement services. Phase three pursues the grave prospect that a subtler collusion might nevertheless exist. I focus on two explanations for why the tests could not reveal abnormal profits to a subtle collusion. First, IPO profits are unobservable because they are dissipated over many revenue sources of a much wider collusion. I examine the closely related SEO market under the theory that a broader collusion would produce similar contracting behavior there. However, a fixed spread is not evident in the SEO market. Second, cartel profits are collected through other means than the 7% spread. Two potential means are the underpricing and the spread paid in the issuer's subsequent SEO. Underpricing is unrelated to concentration in the IPO market, and issuers’ first SEO spreads appear to be normal. These results argue against a subtle collusion. Section 2 of the paper follows with a discussion of the 7% IPO. Section 3 reports the four tests focusing on market structure, collusion, and profit. Section 4 reports tests of the efficient contract theory. Section 5 takes up the additional tests for cartel profit. The paper concludes with Section 6.

This paper examines two theories for the widespread use of a 7% spread in IPOs. The cartel theory is that there is collusion, which could be explicit or implicit, to earn monopoly pro " t from the 7% spread. The e $ cient contract theory is that the 7% contract is a competitive innovation of the " rm commit- ment contract that best suits the IPO. The results of this study show that the IPO market is unconcentrated, entry into the market has been strong, and 7% does not contain abnormal pro " ts relative to other IPOs. Moreover, the 7% contract has persisted despite the Department of Justice investigation of collusion allegations, arguing strongly against collusion. There is no evidence of monopoly pro " t in underpricing or unusual charges in subsequent SEOs, nor does a " xed spread contract appear to be used in the closely related SEO market. The results are thus consistent with competition among investment banks in the pricing of 7% IPOs on the basis of their reputations, placement service, and underpricing to complement the 7% spread. While I cannot rule out that a persistent collusion exists that cannot be detected by the above tests, the results from the well-known tests for collusion, as well as from the newer tests, argue against collusion.