Rent Seeking, Brokerage Commissions, and Pricing and Share Allocation in Initial Public Offerings
61 Pages Posted: 19 Apr 2017 Last revised: 19 Oct 2017
Date Written: October 18, 2017
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
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