The pricing of underwriting services in the Australian capital market

Abstract

Recent media releases have placed enormous strains on the credibility of the underwriting industry. Underwriters in the US and UK have been alleged for, implicitly or explicitly, colluding and fixing underwriting fees. To date, little attention has been paid to the pricing of underwriting services. As underwriting fees constitute a large portion of preliminary expenses for firms going public, the need for such a study is apparent. This study is a first attempt to provide an economic analysis of the determinants of underwriting fees in the Australian capital market. Using 557 firms that went public during the period 1 July 1979 to l January 1996, we find that underwriters systematically price their services according to proxies of ex ante offering risk. 1n particular, our data show that underwriters charge lower fees for older and larger IPO firms.