The level of the IPO spread taken by the underwriter is a controversial issue.
Some claim that the level is too high and attributes it to collusion between investment
banks while others contend to the contrary. The paper examines the spread
in the framework of conflicts of interests between the issuer, the underwriter and
the informed investor. The argument is developed, based upon incentives for the
underwriter. It is shown that the issuer should have the spread large enough for
the underwriter to stay faithful to the issuer
