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

Published in：JOURNAL   OF FINANCIAL MARKETS

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.Thatis,investorsfocusonintegernumbersclosesttonon-integerendpointsof 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).

Keywords：Cognitivereferencepoints, Institutional investors, IPO pricing, IPO auction