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

We study institutional investors' bidding behavior in initial public offering (IPO) auctions. Our findings suggest that institutional investors exhibit cognitive reference point (CRP) anchoring. That is, investors focus on integer numbers closest to non-integer endpoints of 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).