Are initial public offerings significant to firm performance in an emerging stock market? Evidence from China

Qian Gao,Jianzhi Zhao,Hai Long

doi:10.4102/sajbm.v52i1.2517

Abstract

urpose:This study investigates firm performance after going public and explores whether Initial Public Offerings (IPOs) contribute to it.Design/methodology/approach: This study employs comprehensive regression models to examine IPO significance to both operating performance and market performance.Findings/results: It suggests that IPO firms retain their growth over the first 3 years after going public, but the growth does not sustain after the third year in terms of profit-related indicators, which is distinguishing from prior research. IPOs may contribute to firms’ market performance only, they are insignificant to firms’ operating performance in general, whilst industry-adjusted evidence suggests that IPOs are negatively associated with operating performance in terms of return on assets, return on sales and debt to assets.Practical implications: The practical implication for managers is to spend more IPO capitals on business operations to maximise firm value.Originality/value: Market value is taken into account, whilst operating performance is considered only by prior research, and it presents some different findings from prior studies based on developed stock markets.

Highlights

An IPO, which provides firms with access to fund-raising for future growth, is viewed as one of the most significant milestones in a firm’s life cycle (Latham & Braun, 2010). Ragozzino, Shafi and Blevins (2017) state that an IPO is a highly sought-after objective for American entrepreneurial firms because capital is critical to firm growth. Pagano, Panetta and Zingales (1998) document that Italian IPOs are able to finance the future growth of firms. Rajan (1992) documents that IPOs may enhance issuers’ financial capability and their bargaining power with bankers and increase their financial credits
The one-sample test in Table 4 is very significant because the sig. values are less than or approximately 0.005 except those of NPGrth2, EqtyGrth3 and EqtyGrth4 with sigs. of 0.138, 0.106 and 0.155, respectively
This study, by sampling both panel and time-series data from 204 Chinese IPO firms listed on the Growth Enterprise Market of China (GEMC), investigates postIPO firm performance sustainability over 5 years after going public and explores whether IPOs contribute to sustainability

Summary

Introduction

An IPO, which provides firms with access to fund-raising for future growth, is viewed as one of the most significant milestones in a firm’s life cycle (Latham & Braun, 2010). Ragozzino, Shafi and Blevins (2017) state that an IPO is a highly sought-after objective for American entrepreneurial firms because capital is critical to firm growth. Pagano, Panetta and Zingales (1998) document that Italian IPOs are able to finance the future growth of firms. Rajan (1992) documents that IPOs may enhance issuers’ financial capability and their bargaining power with bankers and increase their financial credits. IPO firms have more access to outside resources and a variety of chances to raise capital, such as new share issuances, bank loans, etc., which all potentially contribute to management performance. Mikkelson et al (1997), using IPO samples from 1980 to 1983, show the short-term underperformance of return on assets (ROA) from the last pre-IPO years to the first post-IPO year. This finding is consistent with Jain and Kini (1994), who show post-IPO declines in the market-to-book ratio, price/earnings ratio and earnings per share. Post-IPO firm management performance and sustainability vary across global stock markets

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Conclusion