Are IPO Allocations for Sale? Evidence from Mutual Funds

Abstract

Combining data on explicit brokerage commissions that mutual fund families paid for trade execution between 1996 and 1999 with data on mutual fund holdings of initial public offerings (IPOs), I document a robust positive correlation between commissions paid to lead underwriters and reported holdings of the IPOs they underwrote. Moreover, I find that the correlation is limited to IPOs with nonnegative first-day returns and strongest for IPOs that occur shortly before mutual funds report their holdings, when the noise introduced by flipping is smallest. Overall, the evidence suggests that business relationships with lead underwriters increase investor access to underpriced IPOs.

Keywords: Initial public offerings, IPO allocations, brokerage commissions, mutual funds, bookbuilding, quid pro quo, favoritism

JEL Classification: G24