Hot Market Issue Vs. Hot Political Issue: A Politically Induced Cycle in the Chinese IPO Market

Abstract

It is evidenced that there is a cycle of hot and cold in Chinese IPO market. However, business cycle, information asymmetry and investor sentiment hypotheses provide no explanation to these cyclical fluctuations. With socialist law origin, the Chinese IPO market was strongly influenced by government intervention. This paper argues that policy manipulation is the primary reason for the cyclical fluctuations in Chinese IPO market. Results indicate that changes of IPO quotas from political hot seasons to cold seasons lead to the cycles of hot issue markets in China. It shows that an initial sharp decline in the volume of IPOs over 9 quarters directly after the National Congress of the Communist Party (CCP hereafter), followed by a relatively flat period in the next 4 quarters and a gradual increase in successive quarters where the volume of IPOs peaks in the quarter of National Congress of CCP. The paper also finds that the reason for central government officials manipulate economic policy is to cater to the local government officials, from whom the central government officials gain political support.