The impact on IPO assurance fees of commercial bank entry into the equity underwriting market

Changes in the provisions of the United States Banking Act of 1933 have all owed the entry of commercial banks into the initial public offering (IPO) u nderwriting market. In this paper, we examine the effect of commercial bank equity underwriting on the fees paid to auditors. We predict that IPO assu rance fees will be higher for equity offerings underwritten by commercial b anks than for offerings handled by traditional underwriters because (1) com mercial banks are relatively inexperienced in bringing firms public, requir ing additional assistance from accounting firms in the IPO process; (2) new entrants into the underwriting market may manage lower quality issues that require additional assurance services; and/or (3) since commercial banks h ave greater resources than do traditional investment banks, they are likely to be exposed to greater litigation risk, providing incentives for commerc ial bank underwriters to ensure that the IPO firm purchases greater assuran ce from the auditor. However, we expect fees to decrease if a previous lend ing relationship existed between the commercial bank and its client. Our fi ndings, based on a sample of issues brought to market between 1991 and 1997 , support these expectations.