Purchasing Ipos with Commissions

65 Pages Posted: 15 Mar 2006 Last revised: 6 May 2011

See all articles by Andy Puckett

Andy Puckett

University of Tennessee, Knoxville

Paul J. Irvine

Neeley School of Business

Michael A. Goldstein

Babson College - Finance Division

Date Written: February 22, 2010

Abstract

Using a proprietary database of institutional trades, we find direct evidence that institutions churn stocks, increase the average commission per share they pay, and pay unusually high commissions on some trades in order to send abnormally high commissions to lead underwriters of upcoming profitable IPOs. We show that these excess commission payments are a particularly effective way for transient investors to receive lucrative IPO allocations, and that the presence of abnormal commission payments is related to underwriter characteristics, including the concentration of the underwriter’s client base. Our results suggest that the underwriter’s concern for their long-term client relationships limits the payment-for-IPO practice. We estimate that abnormal commission payments are large for the most profitable issues, and that an additional $1 excess commission payment to the lead underwriter results in $2.21 in investor profits from allocated shares.

JEL Classification: G14

Suggested Citation

Puckett, Andy and Irvine, Paul J. and Goldstein, Michael A., Purchasing Ipos with Commissions (February 22, 2010). AFA 2007 Chicago Meetings. Available at SSRN: https://ssrn.com/abstract=890868 or http://dx.doi.org/10.2139/ssrn.890868

Andy Puckett

University of Tennessee, Knoxville ( email )

437 Stokely Managment Center
Knoxville, TN 37996
United States

Paul J. Irvine (Contact Author)

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

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