Effects of listing on the financial behavior of private-sector firms in China

Abstract

In China, non-listed private-sector firms are discriminated against in terms of access to funding. Initial public offerings (IPOs) change this situation and, likely, the investment behavior of such firms. Utilizing data from 1998 to 2020 regarding both listed and never-listed firms, we establish the causal impact of listing on the financial behavior of private-sector firms in China. Our results are as follows. First, IPOs cause private-sector firms to increase not only newly issued equity financing but also their reliance on debt finance. Second, IPOs enable firms to enjoy lower interest rates on bank loans than never-listed firms. Third, IPOs motivate private-sector private firms to accelerate investment in assets. This generates increased demand for funding sources. Fourth, IPOs increase private-sector firms' reliance on debt finance and accelerate their investment, and this occurs through two mechanisms that we elucidate. Our results suggest that tight regulation on approvals for IPOs of private-sector firms with good prospects should be loosened.