Differences of opinion,institutional bids,and IPO underpricing |
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| Institution: | 1. School of Economics and Management, Beijing Jiaotong University, China;2. College of Business, Lehigh University, USA;3. School of Business, Renmin University of China, China;1. School of Economics and Management, Beijing Jiaotong University, PR China;2. Guanghua School of Management, Peking University, PR China;3. School of Management, Fudan University. Siyuan Building 407, Guoshun Road 670, Yangpu, Shanghai 200433, PR China;1. University of Reading, Reading RG6 6AH, UK;2. University College London, London WC1E 6BT, UK;1. Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822, USA;2. Hunan University, 2 Lushan South Road, Hunan Province, Changsha 410082, China;3. Center for Economics, Finance, and Management Studies (CEFMS), Hunan University, Changsha, China |
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| 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. |
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