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Rent Seeking, Brokerage Commissions, and Pricing and Share Allocation in Initial Public Offerings

61 Pages Posted: 19 Apr 2017 Last revised: 19 Oct 2017

Thomas J. Chemmanur

Boston College - Carroll School of Management

Bibo Liu

Tsinghua University - PBC School of Finance; Tsinghua University - PBC School of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: October 18, 2017

Abstract

Using investor bidding data from 175 Chinese IPOs, we examine the effects of underwriters’ rent-seeking incentives. We find that Chinese IPO underwriters, with no discretion to allocate more shares to favored investors, instead favor mutual funds paying them greater brokerage commissions by discounting offer prices to make more orders from them eligible for IPO share allocations, which results in greater IPO underpricing. Further, underwriters choose price levels at which there are more bids from commission-paying mutual funds as offer prices. Rent seeking is more pronounced for underwriters who are top brokers and therefore place more weight on bidding investors’ interests.

Keywords: IPO Pricing, Rent Seeking, Mutual Funds, Underwriters, Brokerage Commissions

JEL Classification: G24

Suggested Citation

Chemmanur, Thomas J. and Liu, Bibo and Tian, Xuan, Rent Seeking, Brokerage Commissions, and Pricing and Share Allocation in Initial Public Offerings (October 18, 2017). PBCSF-NIFR Research Paper, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2954915 or http://dx.doi.org/10.2139/ssrn.2954915

Thomas Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Bibo Liu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

Beijing, Beijing 100084
China
86-10-62795701 (Phone)

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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