The anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices in IPO auctions: Evidence from China

Abstract We examine the anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices during IPO auctions. We find that the distribution of investor bid prices exhibits sharp spikes around both endpoints (the reference points) of underwriters' proposed price ranges and that investor bid prices increase with the disparity between the reference points and the expected IPO offer price. Our findings are robust to a battery of checks. In addition, the final IPO offer price is positively and the aftermarket performance is negatively associated with the disparity, respectively. Our findings suggest that institutional investors anchor on underwriters' proposed price ranges when bidding in IPO auctions and this anchoring effect has wealth effect on IPO pricing.