Does the two-stage IPO process reduce underpricing and long run underperformance? Evidence from Chinese firms listed in the U.S.

Abstract

Using hand collected data, we test existing hypotheses relating to underpricing and long-term post-IPO performance of two stage IPOs conducted by Chinese firms in the U.S. We find that the two-stage strategy is less costly than conventional IPO process. The underpricing experienced by the two-stage firms in the U.S. is much lower than that realized by conventional Chinese and US domestic IPOs. While two stage firms’ shares underperform those of the control firms in the long run, they exhibit better operating performance than conventional IPOs in the U.S where they raise equity capital. The fact that the two-stage IPO firms exhibit lower operating performance than matched Chinese IPOs is consistent with the assertion that the Chinese IPOs are of better quality than the two-stage IPOs. We also find that two-stage firms with a longer time interval between the listing and IPO dates exhibit lower information asymmetry, pay lower underwriting fees and experience a smaller degree of underpricing and better long-term performance. Overall, the preponderance of our results supports the resolution of information asymmetry hypothesis for the two stage firms.