Is IPO Underpricing a Corporate Strategy?

Abstract

To determine whether Initial Public Offering (IPO) underpricing is a corporate strategy and could improve a firm’s long-run performance, I investigate whether IPO underpricing could promote or impede a firm’s innovation productivity. I use the firms listed in China’s Growth Enterprise Market (GEM) during the period from October 2009 to February 2017. The results of Ordinary Least Sqaure (OLS) show that underpricing is negatively related to innovation productivity, measured as the number of patents. It suggests that managers or underwriters only care about the immediate return and capital accumulation from IPO, rather than a firm’s future growth. Managerial myopia is detrimental to a firm’s long-term survival and development. Difference-in-Difference (DiD) methodology further establishes causality between underpricing and the number of patents, which compares the difference in the number of patents between the three-year window before IPO and after IPO.This probably suggests that IPO underpricing is not an active strategy to target long-term survival and growth. Industry and IPO suspension are also included to solve the effect from unobservable shock on the firm’s innovative capability. My future study could expand to discuss the channel through IPO affect the firm’s innovation productivity.