This paper examines whether the degree of heterogeneity of investors' beliefs is sensitive to reported earnings and “anchor” institutional investment in initial public offerings (IPOs). Evidence from a quasi-experimental setting — an IPO market with anchor investments, and an IPO market without anchor investments — reveals that heterogeneity of investors' beliefs associated with above-market-average earnings yields (EYs) is lower in anchor-backed IPOs than in non-anchor-backed IPOs. The findings, which are robust to endogeneity concerns, suggest that transparent anchor investment ahead of public filing lowers heterogeneity of investors' beliefs and thereby improves financial reporting efficiency, or the timeliness of price discovery from accounting information, independent of accounting standards and financial reporting quality.

This study examines the impact of controlling shareholders’ ownership on trading activity under regimes with different disclosure rules. In regimes with ambiguous disclosure rules, trading volume and turnover are higher when controlling shareholders’ ownership is low and their control rights potentially exceed their cash flow rights. However, this impact diminishes in regimes with strict and unambiguous disclosure rules. These findings are robust to endogeneity concerns, suggesting that investor beliefs about potential agency conflicts are less heterogeneous, as evidenced by their trading behavior when disclosure rules are stringent and well defined. The results highlight the role of disclosure credibility and readability in influencing trading activity, offering new insights into the relationship between ownership structure and market behavior.

We examine the economic role of institutional investors in auction initial public offerings (IPOs) with and without a discretionary tranche of IPO shares pledged to institutional investors prior to public filing. We find that underpricing in auction IPOs with a discretionary tranche is lower (higher) than underpricing in auction IPOs without a discretionary tranche when institutional demand for IPO shares is high (low). The findings, which hold after controlling for potential endogeneity, reveal a cost-benefit tradeoff in auction IPOs that is sensitive to institutional demand, and explain why auction, albeit commonly used for debt instruments, is rarely used for IPOs.

We exploit a quasi-experimental setting in India to empirically demonstrate that non-discretionary allocation of book-building initial public offering (IPO) shares incentivizes institutional investors to understate the value of IPO shares in the primary market, so they can acquire shares at a lower price in the secondary market. Our IPO underpricing framework, which disentangles the effect of institutional investors’ incentive—associated with allocation policy, from the effect of underwriters’ risk—associated with underwriting contract, demonstrates that underpricing in book-building IPOs underwritten with firm-commitment contracts in India is higher in the post-September 2005 non-discretionary allocation investor protection period, than in the pre-September 2005 discretionary allocation period. Conversely, underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 investor protection period than in the pre-September 2005 period. Overall, our findings, which are robust to endogneity concerns, reveal a policy tradeoff between information production and investor protection.