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Using a reform to relax the exclusion rate of highest bids in the book-building process as an exogenous shock, we find that IPO underpricing decreases, which indicates that excluding a certain percentage of the highest bids impairs IPO pricing efficiency. Further tests reveal that relaxing the mandate increases investors' valuation of an IPO, thereby decreasing IPO underpricing. Our results also suggest that the relaxation of the stipulation motivates investors to provide more information, as revealed by fewer anchoring bids and reduced herding behavior, as well as higher opinion divergence and better predictive power for investor bids on post-IPO prices. • IPO underpricing decreases after the stipulation of excluding k% of the highest bids in the book-building process relaxed. • Relaxation of the exclusion mandate increases investors' valuation of the IPO firm. • Relaxation of the exclusion mandate results in fewer anchoring bids and reduced herding behavior. • Relaxation of the exclusion mandate leads to higher divergence of opinions and better prediction power for investor bids. [ABSTRACT FROM AUTHOR]

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