RFS Advance Access published online on September 16, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp066
Endogenous Entry and Partial Adjustment in IPO Auctions: Are Institutional Investors Better Informed?
Department of Finance, National Chengchi University
Department of Finance, University of Iowa
Department of Finance, DePaul University
Send correspondence to Yiming Qian, Department of Finance, University of Iowa, S382 Pappajohn Business Building, 21 E. Market Street, Iowa City, IA 52242; telephone: (319) 335-0934; fax: (319) 335-3690. E-mail: yiming-qian{at}uiowa.edu.
JEL Classification: G24, G28, G32
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Abstract |
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Using a unique dataset of complete bid information for every IPO auction in Taiwan during 1995–2000, we examine the behaviors and returns of two groups—institutional and retail investors—in a setting in which underwriters do not have pricing or allocation discretion. We find that the bids of institutional investors are generally consistent with the predictions of IPO auction theory for informed bidders, while those of individual investors are not. Specifically, returns are higher when more institutional investors enter the auction or bid higher prices, suggesting institutional investors are informed and are also able to shave bids adequately. However, individual investors as a group exhibit return-chasing behavior, are uninformed, and systematically overbid.
We would like to thank Robert Battalio, Walid Busaba, Tom Chemmanur, Phil Davis, David Goldreich, Satadru Hore, Ravi Jagannathan, Andrei Jirnyi, Tim Loughran, Paul Schultz, Sophie Shive, Andrei Shleifer, Ashish Tiwari, Tong Yao, Hayong Yun, and seminar participants at the University of Notre Dame, Hong Kong University of Science and Technology, DePaul University, the University of Illinois at Chicago, the 2007 Western Finance Association Meetings, and the 2009 American Finance Association Meetings.