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.

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.