Another game in town: Spillover effects of IPOs in China

We investigate the stock price reactions of industry competitors to IPOs in China. Contrary to findings in the U.S., we document a positive valuation effect of Chinese IPOs from 2002 to 2013. This finding is robust to alternative rival definitions, investor reaction measurement, and sample selection criteria. Based on the existing theories and institutional setup of the Chinese stock market, we propose three non-competing hypotheses: the signaling hypothesis (i.e., IPOs could convey positive industry-related information), the collusion hypothesis (i.e., rival firms can benefit from the increasing likelihood of collusion), and the substitution hypothesis (i.e., rival stocks can substitute for IPO stocks as an appealing investment). With a series of tests, we demonstrate that the substitution hypothesis can explain this phenomenon. Furthermore, we find that the spillover effects of IPOs decline with the increase in investment choices after 2014.