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Purchasing IPOs with Commissions

Published online by Cambridge University Press:  27 May 2011

Michael A. Goldstein ,
Paul Irvine  and
Andy Puckett
Michael A. Goldstein
Affiliation:
Finance Division, Babson College, 322 Tomasso Hall, Babson Park, MA 02457, goldstein@babson.edu
Paul Irvine
Affiliation:
Terry College of Business, University of Georgia, 444 Brooks Hall, Athens, GA 30602, pirvine@terry.uga.edu
Andy Puckett
Affiliation:
College of Business Administration, University of Tennessee, 437 Stokely Mgmt. Center, Knoxville, TN 37996, pucketta@utk.edu
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Abstract

We find direct evidence that institutions increase round-trip stock trades, increase average commissions per share, and pay unusually high commissions on some trades in order to send abnormally high commissions to the lead underwriters of profitable initial public offerings (IPOs). These excess commission payments are a particularly effective way for transient investors to receive lucrative IPO allocations. 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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 5 , October 2011 , pp. 1193 - 1225
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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