The impact of innovation on IPO short-term performance – Evidence from the Chinese markets

Abstract

Based on the regulation of the Chinese stock market, the current study explores the relationship between pre-IPO innovations with the IPO short-term performance (IPO underpricing and honeymoon period). We investigate R&D spending, characterized by information asymmetry and valuation uncertainty, which can aggravate IPO underpricing. Conversely, we found a positive signal effect for patents which may significantly reduce the extent of IPO underpricing. Therefore, public disclosure of information pertaining to innovation can help issuers to reduce their IPO costs. In conclusion, more R&D spending by IPO firms results in greater IPO underpricing, while a higher number of patents reduces the extent of IPO underpricing. Additionally, we provide extensive analysis of the industrial policy in China under which, the absolute effect of innovation input and innovation outcome on IPO underpricing were greater prior to 2014. However, considering the macroeconomic environment, the industrial policy plays an entirely different role in the Chinese capital market for IPO since 2014. Therefore, we recommend that the government makes use of industrial policy as the “visible hand” to guide the development of industry and further improves the macroeconomic environment for IPO firms.