Institutional investors' cognitive constraints during initial public offerings

Using detailed bid prices from institutional investors for 474 IPOs in China from 2010 to 2012, we find that 62.07% of the bid prices cluster at integers. This phenomenon is more pronounced for IPO firms that are smaller or younger or that exhibit more volatile profitability. Furthermore, the percentage of integer bid prices decreases from 62.07% to 7.58% after a regulatory mandate that significantly reduces the valuation uncertainty of IPOs. Expecting a positive first-day return, institutional investors round the bid price upward to the nearest integer to increase their odds of share allocation. Consequently, the offer price increases and the post-issuance return decreases with the increasing fraction of integer bid prices. Overall, these results suggest that institutional investors, possibly constrained by cognitive resources, carry over heuristics to their bidding activities in IPOs. (C) 2019 Elsevier B.V. All rights reserved.