Incentive Fees: Do They Bond Underwriters and IPO Issuers?

Abstract

This paper examines the impact of incentive fees in mitigating conflicts of interest between the IPO firms and their underwriters. Consistent with cost minimisation hypothesis, our results show that granting incentive fees to underwriters results in lower listing costs and high IPO proceeds. We find IPOs that are large, not cash constrained at the time listing and those underwritten by reputable underwriters are more likely to offer incentive fees. Further tests reveal that incentive fees are granted when the market is volatile, but the average listing costs as a proportion of gross proceeds is 9.328% compared to 12.293% for IPOs that do not provide incentives to their underwriters. The listing costs decrease by 6.724% specifically for IPOs that offer incentive fees. Overall, the evidence shows that large Hong Kong IPOs can minimise their listing costs and maximise their proceeds by offering incentive fees to their underwriters as part of their compensation package.