An explanation of underwriting spread differentials on complex securities

This paper considers underwriting costs for complex securities which involve special tax treatment, conversion features, bond put options, and structural complexity resulting from combining several such features in a single security. Such securities are more difficult to understand and to value than regular coupon bonds, and they put greater administrative burden on the holder. In order to effect a sale and to meet due diligence requirements of the SEC, more information must be communicated by the underwriter to the potential investor. At the same time, investor option features reduce underwriter inventory risk. Increased information costs related to tax and structural complexity are shown by empirical tests to result in increased underwriting spread, while investor-option features result in decreased underwriting spread.