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

55 Pages Posted: 19 Apr 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: November 1, 2016

Abstract

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

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

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

440 Fulton Hall
Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

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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