The overconfidence of investors in the primary market

We analyze the investment performance of 6993 investors bidding in 77 discriminatory IPO auctions in the Taiwan stock market between January 1996 and April 2000, and find that frequent bidders in these auctions have lower returns than infrequent bidders. The frequent bidders bid too aggressively and evaluate the IPO firms too optimistically, resulting in inferior performance. Despite being quite successful in their first few auction bids, the returns for frequent investors are gradually reduced in subsequent auctions. The multivariate model and the analysis of the possibility of perverse incentives of brokerage firms suggest that our findings cannot be explained by rational hypotheses, whereas in contrast, the theories on overconfidence and self-attribution bias can explain the increase in bidding frequency and the deterioration in return performance for bidders in IPO auctions. (C) 2009 Elsevier B.V. All rights reserved.