Can experience mitigate precautionary bidding? Evidence from a quasi-experiment at an IPO auction

Abstract

This paper explores whether market experience exacerbates or mitigates institutional investors’ precautionary bidding behavior. Using an IPO reform in China as an exogenous shock, we apply a difference-in-difference approach to identify a causal relationship between willingness to bid and market experience. The mutual funds’ willingness to bid for the IPOs decreased by 13.53 percentage points after the removal of the three-month IPO lockup period. A one-standard-deviation increase in market experience in terms of IPO participation mitigated 4.36 percent of the decline. The mitigation effect of market experience on precautionary bidding is more pronounced for IPO firms with disadvantaged geographical locations, is attenuated for IPOs certified by reputable underwriters, and is attenuated in mutual funds that have strong business ties with the lead underwriters. Furthermore, we find investors with more market experience help to improve the efficiency of IPO pricing.