Institutional Behavioral Biases In Chinese Initial Public Offerings

Initial public offerings(IPOs)provide the firms with the primary access to raise equity capital,and,therefore,determine the effective resource allocation.Due to the high uncertainty of IPOs,the aim of IPO mechanism design is to induce information production from institutional investors(i.e.,bidders)and improve IPO pricing efficiency.The primary assumption of IPO inquiry is that investors are fully rational.However,large evidence shows the bounded rationality of selves.The behavioral biases tend to manifest under high uncertainty.Based on comprehensive account-level data from the Shenzhen Stock Exchange during the market-oriented period,this dissertation explores whether institutional investors in the IPO setting will exhibit behavioral biases and its economic consequences.The main research contents of this dissertation are as follows:This dissertation explores the relation between cognitive constraints and pricing errors in institutional investors.Empirical results show that higher cognitive constraints(i.e.,lower cognitive ability)are associated with larger pricing errors.After changing the measurement of cognitive constraints,pricing errors and controlling for the bidderunderwriter pair fixed effects,the relation between cognitive constraints and pricing errors remains robust.The effect of cognitive constraints widely exists in all types of institutional investors,such as mutual funds,brokerage firms,and other institutional investors.Besides,reinforcement learning can mitigate the negative effect of cognitive constraints on institutional investors’ bidding behavior.As for the economic consequence,cognitive constraints will impede the information production process.Finally,empirical results further suggest that institutional investors with severer cognitive constraints tend to submit fewer bid shares conservatively.Under different allocation rules(i.e.,pro-rata and lottery regimes),the impact of cognitive constraints on pricing errors is still robust.From the perspective of bidding sequence,this dissertation investigates the impact of decision fatigue on pricing errors in institutional investors.Empirical results show that larger decision fatigue is associated with larger pricing errors,consistent with the selfcontrol model.After changing the measurement of pricing errors and controlling for the bidder-underwriter pair fixed effects,the impact of decision fatigue on bidding behavior is still robust.The effect of decision fatigue widely exists in all types of institutional investors.As for the economic consequence,decision fatigue harms IPO information production.Finally,the more decision-fatigued institutional investors tend to bid more heuristically,such as rounded bid prices,and more passively.Those more decisionfatigued institutional investors eventually obtain fewer allocations.The impact of decision fatigue on pricing errors is widespread under pro-rata and lottery regimes.Furthermore,this dissertation examines the momentum of aggressive bidding behavior with the nondiscriminatory-price(i.e.,uniform-price)restriction in Chinese auctions.In general,persistently uninformative bidding behavior in an IPO will harm IPO pricing efficiency.Empirical results show that institutional investors with higher past aggressive bidding proportion will be more likely to bid aggressively in the subsequent IPO,implying the momentum of aggressive bidding behavior.After changing the measurement of aggressive bids and controlling for the bidder-underwriter pair fixed effects,the momentum in aggressive bidding behavior is still robust.The momentum of aggressive bidding behavior is more pronounced in IPOs with higher investor sentiment and lower overpriced risk.As for the economic consequence,the higher level of past aggressive bidding proportions is associated with a higher offer price.Furthermore,this dissertation explores the bid quantity and bid time of institutional investors with higher past aggressive bidding proportion.Empirical results show that those institutional investors submit fewer bid shares and earlier bids in the current IPO.Moreover,the persistently aggressive bidding behavior is more pronounced under the pro-rata regime.It suggests that institutional investors’ persistently aggressive bidding behavior is not due to positive IPO pricing information.Instead,they are more likely to free-ride on others’ information by simply submitting aggressively high bid prices.