The Learning Behavior Of Institutional Investors

As the important participants in Chinese IPO offline offering, institutional investors’ bidding strategy and flipping activity in secondary market play a crutial role in new issue share price discovery process. By using a proprietary account-level database of bidding and trading data through June 2009 to October 2012 in China IPO market, we empirically study the learning behavior of institutional investors from the perspectives of bidding and trading behavior. Specifically, "past experience" is divided into institutional investors’ past “bidding performance” and "stock-picking ability", while stock-picking ability contains “sentiment-based stock-picking ability” and “value-based stock-picking ability”.We find that the institutional investors exhibit significant reinforcement learning behavior in the sense that higher past bidding performance will lead to more aggressive bidding behavior in subsequent IPO auctions. Besides, institutional investors also show “stock-picking-ability-based learning” behavior. Particularly, since market sentiment can predicts short-run stock performance, institutions with higher sentiment-based stock-picking ability will bid more aggressively in subsequent IPO auctions. In secondary market, they will flip the allocated shares more aggressively and their holding periods are shorter. This implies that their bidding motivation is to obtain short-run price spread between IPO primary market and secondary market. On the other hand, since firm quality can predicts firms’ long-term operating performance, institutions with higher value-based stock-picking ability will bid more aggressive in subsequent IPO auctions, however, they will flip less and hold longer of allocated shares in secondary market, which reveals their value-investment motivation for IPO bidding.Furthermore, compared with the non-fund instituions, fund companies exhibit more cautious reinforcement learning behavior in that higher past bidding performance will make the bidders bid more aggressive price to increase the allocated probability but bid less aggressive quantity to manage the possible risk of negative initial return in subsequent IPO auctions. On the other hand, in contrast to non-fund instituions who focuse on sentiment-based stock-picking ability and flip allocated shares agressively to seek short-run price spread between IPO primary market and secondary market, fund companies emphasize more on value-based stock picking ability and flip less and hold longer of allocated shares.To conclude, our paper is valuable to deepen the understanding on institutional investors’ new shares investments and their economic consequences.