Why don't US Issuers Demand European Fees for IPOs?

Mark Abrahamson, Tim Jenkinson and Howard Jones

Investment banks operating in the United States charge substantially higher fees to manage an initial public offering than is charged in Europe. While IPO techniques have converged over the last decade, new research from Mark Abrahamson, Tim Jenkinson and Howard Jones shows that fees have not. The paper finds:

  • On a like-for-like basis, there is a "3% wedge" between US and European fees
  • This difference in fees applies even when the same banks manage similar IPOs in the US and Europe
  • This cost US issuers an extra $11.4 bn over the last decade
  • Evidence for a lack of competition in the US includes (a) a fixed 7% fee for almost all small-to-medium sized offerings and (b) an industry concentration twice that of Europe
  • Commonly cited explanations for the difference are unconvincing

The research reawakens a debate into US IPO fees that started nearly ten years ago when the Department of Justice investigated price-fixing among banks. The authors find that the previously documented 7% clustering of US fees has continued and even strengthened in recent year. Now that the "bookbuilding" method for conducting IPOs has been adopted in Europe, valid comparisons between US and European IPOs are possible for the first time.

One possible explanation for the difference in fees is that more accurate pricing of IPOs in the US compared with Europe compensates for the higher fees. However, the authors find this not to be the case. Instead, the paper points to differences in the competitive environment, which should worry regulators and encourage US issuers to demand European fees for their IPOs.

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