Clustering of percentage gross spreads and the avoidance of underwriter switching
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 3 November 2022
Issue publication date: 24 October 2023
Abstract
Purpose
Both issuing firms and underwriters shall benefit from the associations in underwriting contracts for seasoned equity offerings (SEOs). Issuing firms that are offered underwriting contracts with clustered gross spreads do not have strong incentives to switch away from the firms' prior SEO underwriters, and thus these existing underwriters are able to maintain or gain greater market share. This study investigates how the clustering of percentage gross spreads affects the likelihood of underwriter switching.
Design/methodology/approach
Using the investment bank-underwritten SEOs in Hong Kong, the authors find that the percentage gross spreads of 40% of these SEOs are clustered at 2.5%. The seemingly unrelated bivariate probit model, Weibull survival mixed model and trivariate probit model are applied to analyse this phenomenon.
Findings
The authors' study provides first direct evidence that the clustering of percentage gross spreads lowers the likelihood of underwriter switching. Investment banks as underwriters can explicitly price underwriting contracts at a clustered level, more likely in periods of greater market volatility, and intentionally retain the banks' client firms using pricing arrangements. The authors' finding and approach offer more direct and distinct support that the issuer–underwriter association can be relationship-based.
Originality/value
Whilst the clustering of fees is interpreted as a type of anticompetitive price sitting, the authors contribute to literature by providing new empirical evidence on why percentage gross spreads as a price dimension are clustered. On top of contract efficiency and collusion, this study's new evidence provides a third view for the clustering of gross spreads.
Keywords
Acknowledgements
The authors thank an anonymous referee and the Editor Alfred Yawson for the insightful comments that helped significantly improve this paper. The research assistance of Xin Yin Ng is highly appreciated. All errors and omissions are the authors' own.
Citation
Lee, C.-C., Too, S.W. and Ooi, K.S. (2023), "Clustering of percentage gross spreads and the avoidance of underwriter switching", International Journal of Managerial Finance, Vol. 19 No. 5, pp. 1002-1023. https://doi.org/10.1108/IJMF-02-2022-0058
Publisher
:Emerald Publishing Limited
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