Does decision fatigue affect institutional bidding behavior? Evidence from Chinese IPO market

Abstract

The psychology literature indicates that the quality of decisions declines after previous decision-making exerts mental resources, which is known as decision fatigue. Using comprehensive detailed bidding data for 783 IPOs in China, we study whether decision fatigue affects institutions’ bidding behavior. The institutions in our sample often bid in several IPOs in a single day. We find that institutions’ bid accuracy declines over the number of previous pricing decisions the institution has already made in a single day, which is less pronounced in funds and brokerage firms. Additionally, consistent with decision fatigue, we find that as the number of previous pricing decisions an institution makes increases, the institution submits more bids at heuristically rounded prices, submits conservative bids with lower prices and fewer shares, and obtains fewer allocations and lower profits. The results remain robust after controlling for unobserved institution-underwriter relationships. Consequently, the elasticity of IPOs with a higher level of decision fatigue is lower.