The Effect of Banks’ Commission Fees in Brazilian IPOs’ Underpricing

Abstract: It is known that underpricing is a widely researched topic worldwide by many different aspects, having instigated studies over the last decades to find reasons in order to explain this phenomenon. However, its relation with banks’ commission fees is still a little explored field, possibly due to the lack of data available to test for this hypothesis. This context raises the following research question: Are underwriters’ commission fees a determinant of IPO underpricing? In Brazil, when companies are willing to raise funds in the stock exchange, they are required to disclose in the IPO prospectus the amount of fees to be paid to underwriters, auditors and attorneys. Based on this available data for the Brazilian market, it will be possible to test the hypothesis of a relation between underpricing and bank’s commission fees, as well as to explore its potential theoretical motivations. Data from 125 Brazilian companies that went public during the period 2007-2018 were collected in order to proceed with this analysis. Multiple linear regressions accounting for different control and explanatory variables were performed to arrive at the final result that an increase on underwriters’ commission fees tends to minimize underpricing, especially considering the Incentive fee category.