The seven percent solution

Gross spreads received by underwriters on initial public offerings (IPOs) i n the United States are much higher than in other countries. Furthermore, i n recent years more than 90 percent of deals raising $20-80 million have sp reads of exactly seven percent, three times the proportion of a decade earl ier. Investment bankers readily admit that the IPO business is very profita ble, and that they avoid competing on fees because they "don't want to turn it into ct commodity business." We examine several features of the IPO und erwriting business that result in a market structure where spreads are high .