Skip to main content Accessibility help
Hostname: page-component-55597f9d44-rn2sj Total loading time: 0.448 Render date: 2022-08-14T15:13:43.455Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "useNewApi": true } hasContentIssue true

Purchasing IPOs with Commissions

Published online by Cambridge University Press:  27 May 2011

Michael A. Goldstein
Finance Division, Babson College, 322 Tomasso Hall, Babson Park, MA 02457,
Paul Irvine
Terry College of Business, University of Georgia, 444 Brooks Hall, Athens, GA 30602,
Andy Puckett
College of Business Administration, University of Tennessee, 437 Stokely Mgmt. Center, Knoxville, TN 37996,


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.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Amihud, Y.Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 3156.CrossRefGoogle Scholar
Benveniste, L. M., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics, 24 (1989), 343361.CrossRefGoogle Scholar
Binay, M. M.; Gatchev, V. A.; and Pirinsky, C. A.. “The Role of Underwriter-Investor Relationships in the IPO Process.” Journal of Financial and Quantitative Analysis, 42 (2007), 785810.CrossRefGoogle Scholar
Boehmer, B.; Boehmer, E.; and Fishe, R. P. H.. “Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns.” Journal of Financial and Quantitative Analysis, 41 (2006), 809828.CrossRefGoogle Scholar
Brennan, M. J., and Chordia, T.. “Brokerage Commission Schedules.” Journal of Finance, 48 (1993), 13791402.CrossRefGoogle Scholar
Carter, R., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 10451067.CrossRefGoogle Scholar
Chemmanur, T. J.; He, S.; and Hu, G.. “The Role of Institutional Investors in Seasoned Equity Offerings.” Journal of Financial Economics, 94 (2009), 384411.CrossRefGoogle Scholar
Chemmanur, T., and Hu, G.. “Institutional Trading, Allocation Sales, and Private Information in IPOs.” Working Paper, Babson College (2007).Google Scholar
Chen, H.-C., and Ritter, J. R.. “The Seven Percent Solution.” Journal of Finance, 55 (2000), 11051131.CrossRefGoogle Scholar
Corwin, S. A.; Harris, J. H.; and Lipson, M. L.. “The Development of Secondary Market Liquidity for NYSE-Listed IPOs.” Journal of Finance, 59 (2004), 23392373.CrossRefGoogle Scholar
Dennis, P. J., and Strickland, D.. “Who Blinks in Volatile Markets, Individuals or Institutions?Journal of Finance, 57 (2002), 19231949.CrossRefGoogle Scholar
Edwards, A. K., and Hanley, K. W.. “Short Selling in Initial Public Offerings.” Journal of Financial Economics, 98 (2010), 2139.CrossRefGoogle Scholar
Goldstein, M. A.; Hotchkiss, E. S.; and Sirri, E. R.. “Transparency and Liquidity: A Controlled Experiment on Corporate Bonds.” Review of Financial Studies, 20 (2007), 235273.CrossRefGoogle Scholar
Goldstein, M. A.; Irvine, P.; Kandel, E.; and Wiener, Z.. “Brokerage Commissions and Institutional Trading Patterns.” Review of Financial Studies, 22 (2009), 51755212.CrossRefGoogle Scholar
Hanley, K. W. “The Underpricing of Initial Public Offerings and the Partial Adjustment Phenomenon.” Journal of Financial Economics, 34 (1993), 231250.CrossRefGoogle Scholar
Hanley, K. W.; Lee, C. M. C.; and Seguin, P. J.. “The Marketing of Closed-End Fund IPOs: Evidence from Transactions Data.” Journal of Financial Intermediation, 5 (1996), 127159.CrossRefGoogle Scholar
Irvine, P.; Lipson, M.; and Puckett, A.. “Tipping.” Review of Financial Studies, 20 (2007), 741768.CrossRefGoogle Scholar
Jenkinson, T., and Jones, H.. “IPO Pricing and Allocation: A Survey of the Views of Institutional Investors.” Review of Financial Studies, 22 (2009), 14771504.CrossRefGoogle Scholar
Jones, C., and Lipson, M.. “Are Retail Orders Different? “ Working Paper, Columbia University (2004).Google Scholar
Lipson, M., and Puckett, A.. “Volatile Markets and Institutional Trading.” Working Paper, University of Virginia (2007).Google Scholar
Ljungqvist, A., and Wilhelm, W. J. Jr. “IPO Pricing in the Dot-Com Bubble.” Journal of Finance, 58 (2003), 723752.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “Why Don’t Issuers Get Upset About Leaving Money on the Table in IPOs?Review of Financial Studies, 15 (2002), 413443.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed Over Time?Financial Management, 33 (2004), 537.Google Scholar
Lowry, M.Why Does IPO Volume Fluctuate So Much?Journal of Financial Economics, 67 (2003), 340.CrossRefGoogle Scholar
Lowry, M., and Schwert, G. W.. “IPO Market Cycles: Bubbles or Sequential Learning.” Journal of Finance, 57 (2002), 11711200.CrossRefGoogle Scholar
Lowry, M., and Shu, S.. “Litigation Risk and IPO Underpricing.” Journal of Financial Economics, 65 (2002), 309335.CrossRefGoogle Scholar
Megginson, W. L., and Weiss, K. W.. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance, 46 (1991), 879903.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.CrossRefGoogle Scholar
Nimalendran, M.; Ritter, J. R.; and Zhang, D.. “Do Today’s Trades Affect Tomorrow’s IPO Allocations?Journal of Financial Economics, 84 (2007), 87109.CrossRefGoogle Scholar
Reuter, J.Are IPO Allocations for Sale? Evidence from Mutual Funds.” Journal of Finance, 61 (2006), 22892324.CrossRefGoogle Scholar
Ritter, J. R., and Welch, I.. “A Review of IPO Activity, Pricing, and Allocations.” Journal of Finance, 57 (2002), 17951828.CrossRefGoogle Scholar
Schwartz, R., and Shapiro, J.. “The Challenge of Institutionalization for the Equity Market.” In Recent Developments in Finance, Saunders, A., ed. Chicago, IL: Irwin Professional Publishing (1992), 3145.Google Scholar
Smith, R., and Bray, C.. “IPO-Abuses Lawsuit Is Settled: Dot-Com-Era Assault on Wall Street Tactics Results in $586 Million Deal.” The Wall Street Journal (Oct. 7, 2009), C1.Google Scholar
Tinic, S. M. “Anatomy of Initial Public Offerings of Common Stock.” Journal of Finance, 43 (1988), 789822.CrossRefGoogle Scholar
Cited by

Save article to Kindle

To save this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the or variations. ‘’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Purchasing IPOs with Commissions
Available formats

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

Purchasing IPOs with Commissions
Available formats

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

Purchasing IPOs with Commissions
Available formats

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *