How do Investors React to Biased Information? Evidence from Chinese IPO Auctions

67 Pages Posted: 22 Jun 2021

See all articles by Jingbin He

Jingbin He

School of Management and Economics, University of Electronic Science and Technology of China

Bo Liu

University of Electronic Science and Technology of China (UESTC)

Yiyao Wang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: June 11, 2021

Abstract

We study how institutional investors utilize potentially biased information by analyzing the effect of IPO underwriters' earnings forecasts on investors' bidding behaviors in Chinese IPO auctions. Despite the presence of upward biases in underwriters' earnings forecasts, we nd that investors' bid prices are higher in IPOs with higher earnings forecasts. The investors' positive reaction to biased information can be explained in a rational expectation model where the underwriter has valuable information about the IPO but has a biased incentive in presenting the information to investors. Consistent with the model's predictions, we find that an investor's bid price is more sensitive to the underwriter's earnings forecast when the forecast bias is expected to be smaller, when the relative precision of the underwriter's information over the investor's information is higher, and when the investor has a higher valuation of the IPO.

Keywords: IPO, analysis forecast, information asymmetry, financial intermediary

JEL Classification: G14, G23, G24

Suggested Citation

He, Jingbin and Liu, Bo and Wang, Yiyao and Wu, Fei, How do Investors React to Biased Information? Evidence from Chinese IPO Auctions (June 11, 2021). Available at SSRN: https://ssrn.com/abstract=3864791 or http://dx.doi.org/10.2139/ssrn.3864791

Jingbin He

School of Management and Economics, University of Electronic Science and Technology of China ( email )

Xiyuan Avenue #2006, Chengdu, Sichuan, China
Chengdu, Sichuan 611731
China

Bo Liu

University of Electronic Science and Technology of China (UESTC) ( email )

No.4, Section 2, North Jianshe Road
Chengdu
China

Yiyao Wang (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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