Are institutional investors subject to gambling preference? Evidence from detailed investor bids of IPO auctions in China

ABSTRACT

Using a unique disclosure database of institutional investor bidding information in Chinese initial public offerings (IPOs), we examine the preference for lottery-like IPO shares of institutional investors. We document that IPOs with higher expected skewness have higher institutional bidding prices and higher offline oversubscription ratio. The effect is stronger for sub-samples with higher investor sentiment and IPOs with higher valuation uncertainty. Moreover, higher expected skewed IPOs experience higher issue prices and initial returns but lower long run returns. These results show that institutional investors have gambling preference for IPO investments and the expected skewness of returns explain institutional bidding prices.

KEYWORDS:

• Institutional investment
• skewness preference
• ipo

Acknowledgments

Cheng acknowledges the financial support from the National Science Foundation of China (grant no. 71872010). Han acknowledges the financial support from the Fundamental Research Funds for Central Universities (grant no. 2019YJS058).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This may cause the difference between Green and Hwang’s (2012) and ours. Green and Hwang (2012) find that comparing with retail investors, institutional investors have little gambling preference using the fraction of small-sized trades (trades below $10,000) as a measure of retail trading intensity. This proxy is based on an assumption that retail investors trade in smaller dollar amounts. However, not all wealthy individuals trade in small amounts and institutional investors in practice often split their large orders. While we conduct INST_ABID and INST_OVERSUB to directly capture the valuation of institutional investors which avoid the assumption.

2. The CSRC mandated that IPO issuers delete at least 10% of the highest bids when setting the IPO offer prices in offline stage in 2013. Hence, the IPO offer prices in 2013 and after are not comparable to those before 2013.

3. Manufacturing is the largest industry group containing a wide range of 25 different sectors. Since non-IPO stocks which fall into manufacturing industry may not be very relevant to a particular manufacturing IPO stock. To minimize this problem, we use all non-IPO stocks belonging to the same sector within the manufacturing industry instead to measure the expected skewness for manufacturing IPOs.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71872010]; Fundamental Research Funds for Central Universities [2019YJS058].