Post-IPO performance and its association with subscription cascades and issuers’ strategic-political importance

Abstract

This study focuses on the strategic-political importance of firms undertaking IPO in China’s international Hong Kong market. This market setting is of particular interest given the unique mix of state-backed and privately-owned issuers drawn to it. I find that an issuer’s strategic-political importance is strongly and positively related to post-IPO returns. An issuer’s strategic-political importance is also negatively correlated with the variance of changes in its post-listing earnings and revenue. Overall, the present study suggests that state support correlates with enhanced post-IPO stock returns and more stable sales turnover and earnings. However, results show that state ownership does not necessarily translate into increased post-IPO revenue and earnings growth. The paper’s second major contribution relates to the identification of pronounced subscription “cascades” (Welch in J Financ 67(2):695–732, 1992) and how these correlate with post-IPO returns. Results suggest that insipid (overly exuberant) subscription demand presages strong (weak) post-listing returns. Consistent with “cascade” arguments (Welch 1992), return reversals occur without commensurate revenue or earnings change. Finally, and in terms of valuation uncertainty (Miller in J Financ 32(4):1151–1168, 1977), findings point to an inverse association between post-IPO stock returns and the magnitude of an issue’s prospectus-disclosed offer price range.