Corporate Governance, IPO Underpricing and Long-Term Performance of Listed Firms in China

Abstract

This is an empirical study that examines the underpricing and aftermarket long-term performance of IPOs in China and IPO underpricing. Corporate governance aspects that may play a role in IPOs, such as ownership structure and external directors, are studied. The study show that firms with higher initial IPO returns are valued more highly by investors - day-one, ten and 21 returns are correlated with long-term performance. Furthermore, the study finds that the ownership structure has a bearing on corporate governance - both foreign and legal person ownership have a positive influence on long-run performance. Management ownership may moderate State influences, but do not influence legal persons’. Conversely, State ownership has a negative bearing. Outside directors have no significant influence, nor has the issue stock exchange. The underwriter has a positive relationship with day-ten and 21 returns only. Larger firms and firms with growth potential are considered more highly by the market. Thus the study demonstrates that firms with higher initial IPO returns are valued more highly by investors long-term, as are firms with foreign and legal person holdings - the market expects these to enhance performance long-term. Management ownership is valued when associated with State ownership. Larger firms are considered more highly by the IPO market in China. The findings demonstrate that initial IPO returns influence the market value long-term and that the ownership structure has a measurable bearing on long-term performance. In particular, firms with foreign holdings are considered more highly by the IPO market.