Family Involvement, Political Connection and IPO Underpricing: Evidence from the Companies Listed on the SME Board of China

Abstract

Based on hand-collected information on private companies listed in the Chinese SME stock market, this paper studies how family involvement and political connection affect firms’ IPO underpricing. Especially, we investigate how underpricing varies with higher- and ordinary level political connection, with institutional development level and with company size. We find that generally, companies with higher-level political connection reap the preferential benefit by having higher offering pricing, that is lower IPO underpricing rate; but companies with ordinary political connection don’t enjoy this benefit. Also, we find that in regions with poorer institutional environment (such as the central and western regions of China), political connection doesn’t affect underpricing, but family involvement helps firm achieving lower underpricing. In regions with well-developed institutional environment (such as the eastern regions), both family involvement and political connection significantly lower the underpricing. At last, we find that for large companies, political connection can lower the IPO underpricing rate significantly; but for small companies, family involvement can lower the IPO underpricing rate. Results are robust to various tests.