Heated Negotiation within the Syndicate and IPOs

This paper examines the determinants of the heated negotiation within the syndicate––i) between the lead underwriter and co-managers and ii) among co-managers––and how it affects IPOs. We find that the heated negotiation is associated with less compensation for co-managers. Our results overall suggest that the inferior co-managers’ bargaining position and superior lead underwriter bargaining power, together increasing a chance of an unfair initial profit sharing, lead to the heated negotiation. The heated negotiation between the lead underwriter and co-managers appears to increase the number of co-manager recommendations, and these recommendations increase when they are better compensated and the IPO size is large. We also consider other key underwriter services such as information production, market making, and all-star analyst coverage. However, we find no significant results and these services are commonly not positively related to co-manager compensation, suggesting that the provision of key underwriter services is tightly linked to their corresponding compensation. JEL Classification: G24