Underwriter Compensation, Marketing Effects, Investor Attention, and IPO Performance

Abstract

After the systematic reform in the IPO market from 2005, underwriting spreads in China keep increasing and become even higher than that in the US market during the past decade. Besides, unlike “the seven percent solution” in the US, spreads in China demonstrate a significant cross-sectional variation. Using the sample of IPOs from 2005 to 2015, we examine the determinants and economic meaning of underwriting spreads in China. We find significant firm, issuance, and policy characteristics that explain the variation of underwriting spreads. Next, we extract abnormal components of spreads to further explore their valuation effects. We document that abnormal spreads can reflect promotional efforts performed by underwriters. Specifically, they are positively associated with institutional investor participation and offer price revision in the IPO process. Moreover, we show that promotional efforts lead to reductions in IPO underpricing. Overall, issuing companies benefit from the deregulation of underwriting services in the way that greater promotional efforts lead to less underpricing and more capital raised by IPO firms. However, government interventions and policy uncertainty can result in increased IPO listing costs in China.