The Long-Run Behavior of Debt and Equity Underwriting Spreads

Abstract

This paper is the first to look at the long-run (30-year) behavior of underwriting spreads in the markets for corporate equity and debt. Specifically, we analyze the determinants of underwriting spreads on corporate bond issues, secondary equity offerings and initial public offerings over the period 1970-2000. We explain the time-varying cross-sectional behavior of these spreads by analyzing three sets of variables or factors: macro (systematic) factors, investment banking market structure factors and issuer specific characteristics. We also analyze the relationship between the direct costs (underwriting spreads) and indirect costs (underpricing) of new issues. Among our many results we find an apparent decline in spreads over time, an increased clustering in spreads for both IPOs and SEOs, the dominance of issuer- specific characteristics in explaining spreads, and a relatively weak linkage between the direct and indirect costs of issuance.