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Differences of opinion, institutional bids, and IPO underpricing

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  • Gao, Shenghao
  • Brockman, Paul
  • Meng, Qingbin
  • Yan, Xuemin

Abstract

Miller (1977) hypothesizes that IPO underpricing arises because the issue price is based on the average opinion while the aftermarket price is set by a minority of optimistic investors. Using a unique data set of institutional bids for a large sample of Chinese IPOs, we show that the IPO issue price is positively related to the quantity-weighted average bid price and unrelated to the market-clearing bid price. In contrast, the first-day closing price is positively related to the market-clearing bid price and unrelated to the average bid price. Overall, our results provide strong support for Miller's explanation of IPO underpricing.

Suggested Citation

  • Gao, Shenghao & Brockman, Paul & Meng, Qingbin & Yan, Xuemin, 2020. "Differences of opinion, institutional bids, and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:corfin:v:60:y:2020:i:c:s0929119918300282
    DOI: 10.1016/j.jcorpfin.2019.101540
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    2. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Institutional investor inattention bias in auctioned IPOs," Journal of Banking & Finance, Elsevier, vol. 150(C).
    3. He, Jingbin & Ma, Xinru & Liao, Jingchi, 2021. "Preference for bid time in hybrid auctioned IPOs: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    4. Zhang, Zhi & Zhang, Di & Jiang, Senyang & Li, Ao & Yu, Wei, 2023. "The effect of language on IPO underpricing: Evidence from a multinational research," International Review of Financial Analysis, Elsevier, vol. 89(C).
    5. Hu, Yi & Dai, Tiantian & Li, Yong & Mallick, Sushanta & Ning, Lutao & Zhu, Baohua, 2021. "Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market," International Review of Financial Analysis, Elsevier, vol. 78(C).
    6. Xuan, Ziyue & Guo, Wenting & Lan, Faqin, 2023. "Underwriters interest binding and IPO underpricing," Finance Research Letters, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Difference of opinion; Initial public offering (IPO); Underpricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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