An Explanation of Underwriting Spread Differentials on Complex Securities

Underwriting costs for complex securities can vary with their special tax treatment, conversion features, bond put options, and structural complexity. Securities with one or more of these features are more difficult to value. These complexities must be communicated to prospective investors by the underwriter. Empirical tests demonstrate that the increased information costs result in increased underwriting spreads, while included investor-option features results in decreased underwriting spreads.