Do IPO Underwriters Collude?

We propose and implement, for the first time, a direct test of the hypothesis of implicit collusion in the U.S. underwriting market against the alternative of oligopolistic competition. We construct two models of an underwriting market — a market characterized by oligopolistic competition among IPO underwriters and a market in which banks collude in setting underwriter fees. The two models leads to dierent equilibrium relations between market shares and compensation of underwriters of dierent quality on one hand and the state of the IPO market on the other hand. We use 39 years of data on U.S. IPOs to test the predictions of the two models. Our empirical results are generally consistent with the implicit collusion hypothesis, and are inconsistent with the oligopolistic competition hypothesis