The Impact on IPO Assurance Fees of Commercial Bank Entry into the Equity Underwriting Market

Changes in the provisions of the United States Banking Act of 1933 have allowed the entry of commercial banks into the initial public offering (IPO) underwriting market. In this paper, we examine the effect of commercial bank equity underwriting on the fees paid to auditors. We predict that IPO assurance fees will be higher for equity offerings underwritten by commercial banks than for offerings handled by traditional underwriters because (1) commercial banks are relatively inexperienced in bringing firms public, requiring additional assistance from accounting firms in the IPO process; (2) new entrants into the underwriting market may manage lower quality issues that require additional assurance services; and/or (3) since commercial banks have greater resources than do traditional investment banks, they are likely to be exposed to greater litigation risk, providing incentives for commercial bank underwriters to ensure that the IPO firm purchases greater assurance from the auditor. However, we expect fees to decrease if a previous lending relationship existed between the commercial bank and its client. Our findings, based on a sample of issues brought to market between 1991 and 1997, support these expectations.