Commercial bank entry into equity IPO underwriting: modern evidence

This study examines the increased participation in underwriting of equity initial public offerings (IPOs) by section 20 subsidiaries of commercial banks. Using a four year test period (January 1995 to December 1998) this study finds that the average underpricing of equity IPOs decreased significantly from 23.0% to 17.4% after the decision to relax revenue constraints, on Section 20 activities of commercial banks, by the Federal Reserve Board on 3 August 1996. A further finding is that the decrease in underpricing is highly related to the increasing IPO market share of commercial banks. This study also finds that IPO underwriter fees did not increase after bank entry. The results of this study provides further evidence that increased participation of commercial banks in new issues markets has had a positive impact on competition and information dissemination in new issues markets.