The Measurement of Short- and Long- Term Returns of Chinese Initial Public Offerings and the Identification of Corporate Governance Variables That May Explain These Returns

Abstract

This thesis examines the relationship between the aftermarket performance of Chinese initial public offerings (IPOs) and corporate governance for firms that listed during the years 1999 to 2001. The primary objective of this study is to investigate the significance of corporate governance variables as explanations of IPOs aftermarket performance. By doing so, a set of hypotheses dealing with the relationships between IPO aftermarket performance and three categories of independent variables: corporate governance variables; issue variables; and control variables, were examined. The descriptive analysis indicates that IPOs in China continue to provide significant short-term returns to investors, although the level of underpricing has declined from that found in earlier studies. This finding suggests a growing level of maturity and sophistication in the Chinese IPO market. The analysis of long-term performance indicates negative returns to investors which is consistent with international evidence but challenges the bulk of prior Chinese studies. It is found that there is no significant relationship between corporate governance variables and IPO returns in the short-term with the exception of board composition, while IPO underpricing is primarily explained by the imbalance between supply and demand and the inefficient capital market in China. The significance of board composition can be explained by the launch of the new corporate governance code on board structures in 2001. Overall the empirical evidence shows that the Information Asymmetry Hypothesis is an appropriate explanation of the underpricing of Chinese IPOs. In the long-term, it is found that corporate governance variables do have explanatory power for the market performance of Chinese IPOs, in particular state ownership and the separation of Chairman and CEO, supporting the notion that corporate governance appears to be important to IPO investors in the long-term. It also confirms the view that investors are willing to pay a premium for the shares of what they consider to be well-governed firms in the long-term. Besides corporate governance variables, both issue variables and control variables are also found to have explanatory power in IPO aftermarket performance. In particular firm size, IPO offer price, IPO lottery rate and industry are significantly related to IPO short-term performance in China, while growth in earning per share, firm size and industry are related to the long-term market performance.