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Information cost or heterogeneous beliefs? An examination of the impact of value uncertainty on auction-style SEO discounts in China

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  • Yang, Mingjing
  • Cheng, Xiaoke
  • Chan, Kam C.
  • Gao, Shenghao

Abstract

Using a unique investor bid price database of a uniform-price auction pricing mechanism of SEOs in China, we seek answers to two research questions: how does value uncertainty relate to investor bid prices (weighted average and standard deviation) and to the subsequent SEO pricing in an auction price mechanism? What is the underlying transmission mechanism between value uncertainty and SEO discounts? Our findings suggest that: (1) the weighted average of investor bid prices is negatively correlated with value uncertainty, indicating an information cost effect; (2) the dispersion of bids (proxied by standard deviation of bid prices) is positively correlated with value uncertainty, indicating the presence of a heterogeneous investor beliefs effect; and (3) SEO discounts are negatively correlated with the weighted average bid price and with the bid price standard deviation. The magnitude of this impact on the SEO discounts, however, is larger for the weighted average bid price than the standard deviation, suggesting that the information cost effect outweighs the heterogeneous investor beliefs effect. Moreover, we find that investor bid prices (weighted average and standard deviation) form part of the transmission mechanism shaping the relationship between value uncertainty and SEO discounts. Our findings are robust to a battery of robustness checks.

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  • Yang, Mingjing & Cheng, Xiaoke & Chan, Kam C. & Gao, Shenghao, 2018. "Information cost or heterogeneous beliefs? An examination of the impact of value uncertainty on auction-style SEO discounts in China," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 206-217.
    • Handle: RePEc:eee:reveco:v:54:y:2018:i:c:p:206-217
    DOI: 10.1016/j.iref.2017.08.008
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    1. Li, Haoyang & Yang, Mingjing & Chan, Kam C. & Gao, Shenghao, 2022. "Do institutional investors’ corporate site visits impact seasoned equity offering discounts? Evidence from detailed investor bids in SEO auctions," Research in International Business and Finance, Elsevier, vol. 62(C).
    2. Yang, Mingjing & Cheng, Xiaoke & Sun, Qian & Lu, Chao, 2019. "How does analyst forecast dispersion affect SEO discounts in uniform-price auction system? Evidence from investor bids in China," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 198-208.
    3. Gao, Shenghao & Liu, Jinzhao & Zhang, Qi & Zhou, Jun, 2023. "Stock hyping before auction-style SEOs: Are primary market investors misled?," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 123-140.
    4. Han, Lin & Cheng, Xiaoke & Chan, Kam C. & Gao, Shenghao, 2022. "Does air pollution affect seasoned equity offering pricing? Evidence from investor bids," Journal of Financial Markets, Elsevier, vol. 59(PB).

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