Using Brokerage Commissions to Secure IPO Allocations

Abstract

Using data, at the investor level, on the allocations of shares in initial public offerings (IPOs), we document a strong positive relationship between the amount of stock-trading commission and the number of shares an investor receives in a subsequent IPO. We find no evidence to support the idea that investment banks allocate shares to investors that are perceived to be long-term investors. Our findings are consistent with the view that investment banks are able to capture some of the profits earned by investors when participating in underpriced IPOs.