Do initial reserves signal long-term IPO stock performance?

Peng Cheng

doi:10.1080/23322039.2015.1018697

Abstract

AbstractThis research examines the long-run Initial Public Offerings (IPO) stock performance of a large Chinese sample, and in particular the relationship between initial reserves (capital reserves and revenue reserves immediately after the IPO) and long-run IPO stock performance. In general, Chinese IPOs do not underperform the market/industry benchmarks, but they significantly underperform their size-matched industry peers. More importantly, Chinese IPO firms tend to issue a large amount of bonus shares (also called as a ‘capitalization issue’, i.e. capitalization of the reserves) after the IPO. Consistent with bonus share signaling hypothesis, Chinese IPO firms exhibit increased operating/stock performance subsequent to bonus issues. Interestingly, the size of the initial reserves is positively associated with long-run IPO stock performance. This research adds another piece of empirical evidence to the literature whether IPOs underperform in the long run, by confirming that the choice of performance me...

Highlights

Some prior studies show that Initial Public Offerings (IPO) firms, largely underpriced, are likely to underperform in the long run (e.g. Loughran & Ritter, 1995; Ritter, 1991; Teoh, Welch, & Wong, 1998)
I investigate whether the size of initial reserves can signal superior IPO stock performance in the long run
This research could be of interest to both academic researchers and public investors, especially those who are interested in the emerging Chinese IPO market, as the results suggest that Chinese IPOs with large initial reserves are likely to exhibit superior stock performance in the long run

Summary

Introduction

Some prior studies show that IPO firms, largely underpriced, are likely to underperform in the long run (e.g. Loughran & Ritter, 1995; Ritter, 1991; Teoh, Welch, & Wong, 1998). Some prior studies show that IPO firms, largely underpriced, are likely to underperform in the long run Loughran & Ritter, 1995; Ritter, 1991; Teoh, Welch, & Wong, 1998). If long-run IPO underperformance is true, it may imply an informational inefficiency and capital misallocation, and opportunities with superior trading returns may exist. I re-examine the long-run stock performance of a large Chinese A-share sample. I investigate whether the size of initial reserves can signal superior IPO stock performance in the long run. This research could be of interest to both academic researchers and public investors, especially those who are interested in the emerging Chinese IPO market, as the results suggest that Chinese IPOs with large initial reserves are likely to exhibit superior stock performance in the long run

Methods

Results

Conclusion