Endogenous Entry and Partial Adjustment in IPO Auctions: Are Institutional Investors Better Informed?

Using a unique dataset of complete bid information for every IPO auction in Taiwan during 1995-2000, we examine the behaviors and returns of two groups—institutional and retail investors—in a setting in which underwriters do not have pricing or allocation discretion. We find that the bids of institutional investors are generally consistent with the predictions of IPO auction theory for informed bidders, while those of individual investors are not. Specifically, returns are higher when more institutional investors enter the auction or bid higher prices, suggesting institutional investors are informed and are also able to shave bids adequately. However, individual investors as a group exhibit return-chasing behavior, are uninformed, and systematically overbid.