Unintended consequence of high bid price exclusion in IPO auctions: Evidence from China

Di Wu, Xiaoke Cheng, Kam C. Chan and Shenghao Gao

Journal of Financial Markets, 2025, vol. 72, issue C

Abstract: Using a reform to relax the exclusion rate of highest bids in the book-building process as an exogenous shock, we find that IPO underpricing decreases, which indicates that excluding a certain percentage of the highest bids impairs IPO pricing efficiency. Further tests reveal that relaxing the mandate increases investors’ valuation of an IPO, thereby decreasing IPO underpricing. Our results also suggest that the relaxation of the stipulation motivates investors to provide more information, as revealed by fewer anchoring bids and reduced herding behavior, as well as higher opinion divergence and better predictive power for investor bids on post-IPO prices.

Keywords: IPO auctions; IPO underpricing; Bid price exclusion; Beauty contest (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:72:y:2025:i:c:s1386418124000545

DOI: 10.1016/j.finmar.2024.100936

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