Institutional Bidding in IPO Allocation: Evidence from China

Using a proprietary database of institutional investor bidding for shares in Chinese IPO allocations, we examine the information content and predictive ability of bidding dispersion. IPOs with higher levels of bid dispersion experience greater first-day return than other IPOs by discounting the offer price as a compensation for investors’ bearing valuation uncertainty and estimation risk, as well as greater trading volume and price volatility. Our results hold after controlling for potential endogeneity and using alternative dispersion measures. Dispersion of bidding prices is negatively predictive both of one-year operating performance post-IPO and three-month stock performance. Bid characteristics, such as the timing of the bid and the frequency and the type of the bidder, matter in the pricing of IPOs, as does the geographic distance between bidders and the IPO firm. Using a 2010 regulation change in the IPO share allocation rule as a natural experiment, we show that the new rule decreases dispersion among institutional bidders but increases the effect of dispersion on first-day return. The evidence highlights the role of institutions and regulatory policies on IPOs in China.