Does The Gross Spread Split Compensate Lead Underwriters For Analyst Coverage?

Since underpricing and gross spread are the two main revenue sources for investment banks in public offerings, this paper examines the IPO syndicate data from January 1997 to June 2002 to investigate whether the gross spread split compensates investment banks for analyst coverage. The authors find no evidence to support the premise that the gross spread is used by lead underwriters as compensation for analyst coverage. The results are consistent with the claim by Cliff and Denis (2004) that compensation for analyst coverage arises from underpricing or alternatively from a non-pecuniary form of client or issuer satisfaction for securing future profits or follow-on offerings.