Stock exchange oversight and investor quotes: Evidence from initial public offering comment letters in China

Abstract

This study investigates whether and how changes in the information environment resulting from the issuance of comment letters during the initial public offering (IPO) process, as is newly implemented by stock exchanges in China, affect IPO quotes from institutional investors. We find a significant and negative association between IPO review intensity, measured as the number of comment letter questions issued by the stock exchange or the change in length between the initial and final prospectuses, and the number of quotes received by the firm from institutional investors. Further analyses reveal that IPO review intensity is negatively associated with the divergence of quotes received from institutional investors. Additional analyses reveal that institutional investors tend to pay more attention to questions indicating regulatory oversight than to questions requesting factual information disclosure. Overall, the findings of this study provide support for the hypothesis that the issuance of comment letters, as a part of the interaction between stock exchanges and equity-issuing firms during the IPO process, plays a significant oversight role and consequently influences investor decision-making.