55 Pages Posted: 19 Apr 2017
Date Written: November 1, 2016
Using investor bidding data from 175 Chinese IPOs, we examine the effects of underwriters’ rent-seeking incentives on IPO pricing. We find that underwriters have strong favoritism towards mutual funds that pay brokerage commissions to them when setting IPO prices. Specifically, because Chinese underwriters do not have discretion on IPO share allocations, they favor and compensate commission-paying mutual funds by discounting offer prices to make more orders from these mutual funds eligible for IPO allocations, resulting in increased IPO underpricing. Underwriters are also more likely to choose price levels at which there are more orders from commission-paying mutual funds as offer prices. The effects of brokerage commissions are more pronounced when an underwriter is a top broker, which means that the underwriter cares more about the interests of bidding investors rather than the issuing firm.
Keywords: IPO Pricing, Rent Seeking, Mutual Funds, Underwriters, Brokerage Commissions
JEL Classification: G24
Suggested Citation: Suggested Citation
Chemmanur, Thomas J. and Liu, Bibo and Tian, Xuan, Rent Seeking, Brokerage Commissions, and Pricing and Share Allocation in Initial Public Offerings (November 1, 2016). PBCSF-NIFR Research Paper, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2954915 or http://dx.doi.org/10.2139/ssrn.2954915