Competition in the Underwriting of Seasoned Equity Offerings

Abstract

We show that competition in equity underwriting exists, even though fees or spreads are clustered. Our findings differ from those of studies that conclude that clustered fees are evidence of collusion. Applying an economic model of firms' strategic choice under demand uncertainty to investment bank decision making, we investigate investment bankers' choice between price and quantity competition and find that quantity competition will be preferred. We test predictions derived from this model using a survey questionnaire of over 100 Managing Directors of investment banks and Chief Financial Officers of the firms whose equity issues they underwrite. Their responses are consistent with the model's predictions. The survey results show that underwriting fees are not a key concern of issuing firms and that investment bankers do not compete on a fee basis. Instead, they use capacity as a competitive variable: working overtime and turning down business from minor customers in order to nurture relationships with their best customers and maintain their reputations. Relationships with underwriters and the reputation of their investment bank are the variables that issuers report as being most important to them. We study seasoned equity offerings (SEOs) conducted using an accelerated offering procedure because, despite having received relatively little attention in the literature, accelerated offerings are now the dominant form of SEO