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Differences of opinion, institutional bids, and IPO underpricing

Shenghao Gao, Paul Brockman, Qingbin Meng and Xuemin Yan

Journal of Corporate Finance, 2020, vol. 60, issue C

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.

Keywords: Difference of opinion; Initial public offering (IPO); Underpricing (search for similar items in EconPapers)
JEL-codes: G10 G18 G28 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jcorpfin.2019.101540

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