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Cognitive reference points, institutional investors' bid prices, and IPO pricing: Evidence from IPO auctions in China

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  • Gao, Shenghao
  • Meng, Qingbin
  • Chan, Jesse Y.
  • Chan, Kam C.

Abstract

We study institutional investors' bidding behavior in initial public offering (IPO) auctions. Our findings suggest that institutional investors exhibit cognitive reference point (CRP) anchoring. That is, investors focus on integer numbers closest to non-integer endpoints of proposed IPO price range as CRPs when making IPO bids. When institutional investors round up (down) the endpoints of the proposed IPO price range to arrive at CRPs, we find: (1) the average bid price is higher (lower), (2) the subsequent IPO offer price is higher (lower), and (3) IPO first day return is lower (higher).

Suggested Citation

  • Gao, Shenghao & Meng, Qingbin & Chan, Jesse Y. & Chan, Kam C., 2018. "Cognitive reference points, institutional investors' bid prices, and IPO pricing: Evidence from IPO auctions in China," Journal of Financial Markets, Elsevier, vol. 38(C), pages 124-140.
    • Handle: RePEc:eee:finmar:v:38:y:2018:i:c:p:124-140
    DOI: 10.1016/j.finmar.2017.09.002
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    Cited by:

    1. Wenjun Wang, 2023. "Can experience mitigate precautionary bidding? Evidence from a quasi-experiment at an IPO auction," Journal of Asset Management, Palgrave Macmillan, vol. 24(2), pages 148-163, March.
    2. Ma, Xinru & He, Jingbin & Liao, Jingchi, 2021. "Does decision fatigue affect institutional bidding behavior? Evidence from Chinese IPO market," Economic Modelling, Elsevier, vol. 98(C), pages 1-12.
    3. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Institutional investor inattention bias in auctioned IPOs," Journal of Banking & Finance, Elsevier, vol. 150(C).
    4. 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).
    5. Güçbilmez, Ufuk & Ó Briain, Tomás, 2021. "Bidding styles of institutional investors in IPO auctions," Journal of Financial Markets, Elsevier, vol. 53(C).
    6. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Air pollution and institutional investors' valuation bias during initial public offerings," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    7. Gao, Shenghao & Cao, Feng & Fok, Robert (Chi-Wing), 2019. "The anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices in IPO auctions: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 111-127.
    8. 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).
    9. Li, Yi & Zhang, Wei, 2021. "Another game in town: Spillover effects of IPOs in China," Journal of Corporate Finance, Elsevier, vol. 67(C).

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    Keywords

    Cognitive reference points; Institutional investors; IPO pricing; IPO auction;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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