Uncertainty of political subsidy, heterogeneous beliefs, and IPO anomalies

Abstract

This paper focuses on financial subsidies introduced by the Chinese government to benefit IPO firms. Because of high uncertainty, subsidy information deepens the divergence of opinions regarding IPO firm value among investors, and the IPO issuers accordingly raise their offer prices. This paper finds that the divergence of analyst forecasts is greater and the offer prices are higher when issuers have received higher subsidies before listing. Moreover, the decrease in investors’ disagreement and market performance after listing is also serious. Compared to state-owned issuers, the influence of subsidy information on heterogeneous beliefs, offer prices, and long-run performance of non-state-owned issuers is higher. Overall, this paper extends the research regarding the pricing of political information by following heterogeneous beliefs theory. Moreover, this paper develops a new IPO pricing framework under heterogeneous beliefs.