Underwriting and Underpricing

Underwriting spread represents the net proceeds that the underwriter will realize from the investment. It is the difference between the price per share that is paid to an issuing corporation by an underwriter or underwriting group, and the public offering price that the underwriter offers to the public. While traditionally the underwriting spread was viewed as compensation for underwriting the issue, it now has been introduced as an incentive fee where it act as bonus for investment bank when they performance better than expected. There has been evidence of clustering of spreads internationally, in the US spread is clustered at 7%( Chen+Ritter 2000), in Hong Kong 95% of fees are clustered at 2.5%( torstia 2003) and in Europe fees range from 3-4%. In general, the more clustering presented in a country, the smaller the spread, vice versa.
Furthermore, Esho et al (2004) analyzed the underwriting spread in Euro market found out that there is a positive and direct relationship between the fee charged by the investment banks and the reputation of the investment bank. (link to underpricing??)
Underpricing refers to the first trading day closing price typically exceeds price at which the shares were offered to the public. Over 20 years, researchers investigated the underpricing puzzle associated with initial public offerings (IPOs). Ibboston1975, Ibbostson and Jaffe 1975 and Ritter 1984, among others, all document convincing evidence that initial public offerings are, on average underpriced. There are sufficient evidence of underpricing in UK (increase over time, from 3.8% to 19%, Chambers and Dimson 2009), USA (40% between 1999-2003) and internationally(>15%). Visa's offering in March 2008 is a good example of how IPOs are strategically underpriced. Although the IPO of Visa was an almost certain success, the price was kept at a low $44. As buyers ran in, the stock jumped to $69 and, although it fell back to $56.40 by the close, there was a 28.4% underpricing, thus