China’s Securities reforms and IPO wealth loss

We revisit initial public offering (IPO) underpricing in China before and after the 2001 China Securities Regulatory Commission reforms targeting the IPO process and strengthening corporate governance, using Habib and Ljungqvist’s (2001) wealth loss measure instead of headline underpricing. Habib and Ljungqvist argue that the extent to which owners care about underpricing depends on both headline underpricing and the percentage of IPO shares issued relative to total shares outstanding. We find that in the post-reform period, relative to the pre-reform period, the wealth loss for pre-IPO owners is lower, the incremental effect of the association between wealth loss and state-retained ownership is significantly positive, and a higher proportion of independent directors on the board moderates the wealth loss. Our findings suggest that the more market-oriented IPO process and the corporate governance reforms provide insiders of Chinese IPO firms with greater opportunities to influence IPO pricing and thereby reduce their wealth loss.     

IPO activity and information in secondary market prices

This paper explores the link between IPO underpricing and financial markets. In my model the IPO is a mean for a capital constrained initial investor to exit and thereby to raise funds for a new investment opportunity. This investor is privately informed vis-a-vis outside investors about the profitability of the new opportunity and the quality of the firm to be offered in the IPO. He can then use the offer price and the fraction of shares sold as signals of his private information. The model shows that underpricing is not only linked to firm’s characteristics, i.e. firm value, but to elements external to the firm, i.e. new investment profitability and financial markets characteristics. In particular higher market efficiency reduces the cost of listing. This results in lower underpricing and the listing of more valuable firm. Similarly, a higher lower bound of the new investment’s profitability reduces the information asymmetry and hence reduces underpricing and widens the range of firms listed.     

Underpricing and aftermarket performance of American depositary receipts (ADR) IPOs

American depositary receipts (ADRs) are negotiable instruments representing foreign company shares traded in US dollars in the US capital market. We present comparative analyses of the pricing and aftermarket performance of Initial Public Offerings (IPOs) by ADRs and a matching sample of US firms over the 1990–2001 period. Offered by large, well-known multinationals, ADR IPOs go through a detailed scrutiny, and incur significant costs, during the pre-IPO period to recast financial statements in conformity with SEC rules and the US GAAP. This mitigates the information asymmetry between the IPO firm and investors. We categorize the ADR issuing country as developed or emerging, and our sample includes several cases of privatization of state owned corporations. The analyses indicate that (1) ADR IPOs are significantly less underpriced than comparable US IPOs; (2) IPOs from developed countries are more underpriced; and (3) Privatization IPOs are less underpriced than non-privatizations. The lower underpricing of ADR IPOs persists even after differential IPO attributes, the traditional proxies for information asymmetry and, the unique characteristics associated with ADR IPOs, are accounted for. We conclude that extant literature offers only partial explanation for this puzzling phenomenon.     

Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market

This paper investigates the effects of underwriter reputation on initial public offering (IPO) underpricing in the Chinese Growth Enterprise Market, in light of the conflicting evidence in the literature on IPO underpricing. Using data during the post global financial crisis period, we find that IPO firms with prestigious underwriters have lower market-adjusted initial returns on average. We further find that prestigious underwriters reduce IPO underpricing by minimizing the time gap between the offering and listing, choosing high-quality firms to underwrite, and reducing information asymmetry between issuers and investors. In the presence of institutional investors, however, we find that more underpricing occurs, as these investors tend to obtain access to IPO shares at a higher price discount via private placements. This new finding suggests that the institutional investors have a role to play in the case of high under-pricing, which partly gets corrected via underwriter reputation.     

Let us work together: The impact of customer strategic alliances on IPO underpricing and post-IPO performance

Leveraging the availability of three years of pre-IPO data and related vs unrelated-party customer information for Chinese firms, we examine the impact of customer strategic alliances (CSA) on IPO underpricing from 2007 to 2015. Our core findings suggest that IPO firms with CSAs have less IPO underpricing than those without such a relationship. The decrease in underpricing is more salient for IPO firms that have non-related-party customers. Additional analysis suggests that the core findings are primarily driven by firms with good information environment pre-IPO, including high audit quality, high analyst following, and low earnings management. We interpret the results as indicating that a good pre-IPO information environment enhances the credibility of CSA relationships and signals high IPO quality. Furthermore, we document that a CSA relationship has a positive impact on an IPO firm's post-IPO performance, especially when the firm has non-related-party customers. Overall, CSAs reduce IPO underpricing and enhance IPO returns post-IPO.     

Do investors turn a blind eye to risk-factor disclosures by state-supported firms?

There is scant empirical evidence on how government involvement affects investor reactions toward firm-specific information. Our study provides new evidence on how investors respond to risk-factor disclosures in IPO prospectuses in China, where state-supported firms presumably receive government-offered implicit insurance against bankruptcy risk while bearing significant agency risks. We find an insignificant association between risk-factor disclosure quality and IPO underpricing (or post-IPO stock return volatility) among state-supported firms. The finding suggests that state-offered implicit insurance becomes the predominant consideration when investors value IPO shares of state-supported firms, thereby weakening investor reactions to high-quality risk-factor disclosures. Our study expands the scope of IPO underpricing literature by implying that simply increasing disclosure transparency in the IPO prospectus may not resolve the IPO underpricing issue in a government-dominated economy such as China.     

公司治理与IPO抑价——来自中国股票市场的经验证据

Jensen与Meckling(1976)认为,代理成本是投资者愿意支付的价格与公司内在价值之间的差异。投资者对公司代理成本的预期也会体现在IPO定价过程中,良好的公司治理结构有助于降低公司IPO抑价。本文以我国2002—2003年的133家IPO公司为研究样本,研究样本公司治理结构特征对IPO抑价的影响。结果发现,控制权结构特征以及关联交易性质对IPO抑价有显著的影响,而董事会独立性对IPO的抑价影响则不显著。本文的结果表明,良好的公司治理结构可以显著地降低IPO抑价,降低公司股权融资成本。     

Diversification of pre-IPO ownership and foreign IPO performance

We examine the diversification of pre-IPO ownership of foreign-listed firms and how the presence of pre-IPO shareholders from the host country affects foreign issuer’s subsequent IPO and post-IPO activities. Using a sample of foreign-listed Chinese firms, we find that the presence of pre-IPO shareholders from the host country is associated with a significant reduction in direct and indirect IPO costs, especially for issuers without international sales and for firms operating at a loss. Benefits of such pre-IPO affiliation persist into the post-IPO period as manifested in greater analyst coverage and better acquisition performance in the host country. Our paper provides new insight on the value of pre-IPO ownership diversification and identifies one strategy that firms can use to overcome the liability of foreignness.