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.

We use New York City (NYC) taxi data to identify trips between mutual fund offices and local firm headquarters. NYC funds overweight the stocks of local firms they visit via taxi, and firm visits are associated with superior investment performance. Firm visits are elevated prior to earnings announcements, and mutual fund trades that are associated with firm taxi visits predict earnings surprises. The results are generally stronger when fund and firm executives share educational connections. Additional tests support the conclusion that funds’ local bias and investment performance are driven by portfolio managers’ efforts and ability to actively gather material information.