Government Intervention in IPO—Evidence on the Exemption from IPO Regulatory Requirements in China

Abstract

ABSTRACTThis study examines whether and how the Chinese central government's intervention in the IPO process, in terms of the State Council's granting the discretionary exemption to help IPO firms circumvent its own regulation on the three-year operation requirement, is related to the quality of IPO firms and investor protection. The results show that the State Council grants the exemption to IPO firms with relatively better operating performance in both the pre-IPO and the post-IPO periods. Although the financial information of exempt IPO firms for the pre-IPO period is pro forma, investors do not show more concern. As a result, they do not react more negatively to these firms than to the regular IPO firms on the IPO day. Moreover, the stock of exempt IPO firms outperforms that of regular IPO firms in both the short term and the long term after the IPO. Overall, the results indicate that the central government can sometimes act as a helping hand, which produces positive impacts on resource allocations.