Sponsor, institutional investor, and quotation behavior: Theory and evidence from China

Abstract

How do interactions between institutional investors and sponsors affect the quotations in IPOs? This paper provides evidence that connections between the above two agencies result in variations in the institutional investors’ quoted prices and quotation frequency in China stock market. Using a Bartik-style identification strategy that links shocks to connections between institutional investors and sponsors in China, we find that a stronger connection between a sponsor and an institutional investor lowers the quoted price to a realistic level and increases the probability that the investor joins the quotation of the sponsor’s main-board IPO during the “three highs” period in which the “favor quotation” is common. This relationship will be more significant for quotation frequency when more investors are connected to sponsors within a city. Moreover, the mouth-to-mouth effect tends to be weaker in cities with more investors.