On Excess Compensation Earned by Underwriters in Firm Commitment Initial Public Offerings of Common Stock: An Empirical Analysis

This paper examines compensation for the underwriting activity in firm commitment initial public offerings (IPOs) of common stock in the U.S. When compensation for origination, management and marketing efforts are excluded from total underwriter compensation, we find that the portion of the total compensation assigned for the underwriting activity itself exceeds theoretical compensation only for issues that sell out very quickly. We interpret this finding as empirical evidence supporting the incentive for underwriters to underprice IPOs. Finally, we find excess compensation to underwriters is positively related to the riskiness of the IPO and negatively related to the degree of competition among investment bankers and the size of the IPO.