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The anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices in IPO auctions: Evidence from China

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  • Gao, Shenghao
  • Cao, Feng
  • Fok, Robert (Chi-Wing)

Abstract

We examine the anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices during IPO auctions. We find that the distribution of investor bid prices exhibits sharp spikes around both endpoints (the reference points) of underwriters' proposed price ranges and that investor bid prices increase with the disparity between the reference points and the expected IPO offer price. Our findings are robust to a battery of checks. In addition, the final IPO offer price is positively and the aftermarket performance is negatively associated with the disparity, respectively. Our findings suggest that institutional investors anchor on underwriters' proposed price ranges when bidding in IPO auctions and this anchoring effect has wealth effect on IPO pricing.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:111-127
    DOI: 10.1016/j.iref.2018.08.013
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    2. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2021. "Non-pricing drivers of underwriters’ market shares in corporate bond markets," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 671-693.

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    More about this item

    Keywords

    Anchoring effect; IPO auction; Institutional investors; Underwriter;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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