Journal of Business Finance & Accounting, 33(7) & (8), 979–1005, September/October 2006, 0306-686X doi: 10.1111/j.1468-5957.2006.00588.x Why do Underwriters Charge Low Underwriting Fees for Initial Public Offerings in Taiwan? Hsuan-Chi Chen, Robert C. W. Fok and Yu-Jen Wang ∗ Abstract: In Taiwan, underwriting fees for initial public offerings (IPOs) are extremely low compared to fees in other countries. From 1989 to 1999, the average underwriting fee for IPOs in Taiwan is 0.99%—far below the regulatory limit. Although the Taiwanese under- writing industry is highly concentrated, underwriting fees do not cluster at any particular level. We examine the underwriting fee and income structure in Taiwan and find support for an incentive hypothesis. Underwriters have an incentive to charge lower underwriting fees when market demand for IPO shares increases and capital gains account for a larger portion of their total income. Keywords: initial public offerings, underwriting fees 1. INTRODUCTION Underwriters play a key role in the initial public offering (IPO) process as they advise issuing firms, set offer prices, and distribute new issues. In return, issuing firms pay underwriters according to contractual agreement. The net proceeds of an IPO are affected by contracted flotation costs, which are determined by such factors as underpricing, compensation to underwriters, and other administrative expenses (e.g., printing and accounting; Ritter, 1987). However, the price of underwriting services affects more than the issuers’ net proceeds and has important implications for investors. For example, underwriting fees may be related to the offer price and the level of underpricing. The pricing of underwriting services has attracted attention recently and has become a major issue for IPO researchers. For example, Chen and Ritter (2000) find that gross spreads for medium-size IPOs in the United States cluster at 7% and suggest that US underwriters charge high gross spreads strategically to prevent cutthroat price competition. Chen and Ritter’s finding prompted a US ∗ The authors are respectively from the Department of Finance, Yuan Ze University, Taiwan; the Department of Business, University of Wisconsin – Parkside, USA; and Polaris Securities, Taiwan. (Paper received March 2004, revised version accepted August 2005. Online publication May 2006) Address for correspondence: Robert C. W. Fok, Department of Business, University of Wisconsin – Parkside, 900 Wood Road, P.O. Box 2000, Kenosha, WI 35141-2000, USA. e-mail: fok@uwp.edu C  2006 The Authors Journal compilation C  2006 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 979