The Anchoring Effect in the Primary Market: Evidence from Dual-Listed Firms in Segmented Markets
48 Pages Posted: 26 Feb 2008
Date Written: February 18, 2008
The anchoring effect is demonstrated in the psychological literature to be prevalent and strong. We directly test the anchoring effect and confirm its presence in the primary market. We utilize the IPO data of dual-listed Chinese A and H-shares for which potential anchors can clearly be identified. Due to differences in the required rate of returns, the valuation of A-shares is higher than that of their corresponding H-shares. We provide strong evidence that when a firm sequentially issues H- and A-shares, the A-share offer price is anchored by the lower H-share price, which partially contributes to high A-share IPO underpricing.
Keywords: anchoring, IPO underpricing, cost of capital, segmented market
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation