Scandinavian Working Papers in Economics

Stockholm School of Economics Asia Working Paper Series,
Stockholm School of Economics, Stockholm China Economic Research Institute

No 2016-39: Judging a Book by Its Cover: Analysts and Attention-Driven Price Patterns in China’s IPO Market

Xunan Feng and Anders C. Johansson ()
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Xunan Feng: Southwestern University of Finance and Economics
Anders C. Johansson: Stockholm China Economic Research Institute, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We hypothesize that investors in China’s market for initial public offerings (IPOs) are influenced by the level of attention given to upcoming offerings. Using a novel data set on analyst coverage, we find that investor attention as proxied by the number of analysts covering a firm drives IPO underpricing. We also show that analyst coverage is positively related with small trading activities during the first trading day. Our results suggest that analysts attract the attention of individual investors, who then drive IPO initial returns and cause related long-term price reversals in the post-IPO market. These findings contradict the argument that a primary role of analysts is to reduce information asymmetry and instead support the attention hypothesis.

Keywords: Attention; Investor behavior; Behavioral biases; Analyst coverage; Initial public offerings; China

JEL-codes: G11; G14; G15; G24

79 pages, December 12, 2016

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