Are IPO Allocations for Sale? Evidence from Mutual Funds



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    • Jonathan Reuter is at the Lundquist College of Business, University of Oregon. I wish to thank an anonymous referee, Reena Aggarwal, Daniel Bergstresser, Walid Busaba, John Chalmers, Randy Cohen, Diane Del Guercio, Glenn Ellison, Wayne Ferson, Denis Gromb, Dirk Jenter, Jonathan Lewellen, Alexander Ljungqvist, Tim Loughran, Robin McKnight, Wayne Mikkelson, Stew Myers, Eddie O'Neal, Megan Partch, Jeffrey Pontiff, Jay Ritter, Jorge Rodriguez, Antoinette Schoar, Donghang Zhang, individuals within the mutual fund and underwriting communities, and seminar participants at Boston College, the Federal Reserve Bank of Boston, the Federal Reserve Board of Governors, Harvard Business School, MIT, Texas A&M, University of Illinois Urbana-Champaign, University of Oregon, University of Southern California, U.S. Department of Justice, Washington University in St. Louis, the Second EVI Conference on Entrepreneurship, Venture Capital, and Initial Public Offerings, the 2003 Pacific Northwest Finance Conference, the 2004 Western Finance Association Meetings, the Tuck Conference on Contemporary Corporate Finance Issues III, and the Ohio State University, Federal Reserve Bank of New York, and Journal of Financial Economics Conference on Agency Problems and Conflicts of Interest in Financial Intermediaries for helpful comments. The financial support of an NSF Graduate Research Fellowship and the MIT Entrepreneurship Center are gratefully acknowledged. Remaining errors are my own.


Combining data on 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 underwrite. 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.