Abstract
Abstract We investigate whether firms’ withdrawals of their initial public offering (IPO) applications, as announced by the China Securities Regulatory Commission (CSRC) on 3 April 2013, lead to a contagion effect on the market reaction to other listed firms sponsored by the same agent. We find that listed firms that have the same sponsor as an “IPO withdrawing firm” face a negative market reaction, suggesting that firms’ IPO withdrawals make investors worried about the quality of sponsors and cause negative abnormal equity returns for listed firms with the same sponsor. We also find that this contagion effect is concentrated among listed firms with good accounting information because this event provides more unexpected negative information for investors. In addition, the contagion effect is concentrated among listed firms with more media or analyst coverage. This is because media and analyst coverage attracts investors’ limited attention, making them more pessimistic and finally leading to an increase in the contagion effect. Our study provides support for the contagion theory and investigates the effectiveness of the CSRC’s special checks on financial statements, which may give some suggestions for the healthy development of the IPO market.
Highlights
The securities issuance sponsorship system is a significant institutional arrangement aiming to assure the information quality of firms applying for initial public offerings (IPOs) in China
The results indicate that the market reaction to related firms is more negative than the market reaction to unrelated firms, suggesting that the contagion effect of related firms is stronger than that of unrelated firms
The objective of this study is to examine the contagion effect of IPO withdrawal
Summary
The securities issuance sponsorship system is a significant institutional arrangement aiming to assure the information quality of firms applying for initial public offerings (IPOs) in China. The contagion effect of IPO withdrawal means that this event causes a negative market reaction towards the listed firms sponsored by the same agent as the “IPO withdrawing firm” (hereinafter “related firms”). This is because an IPO withdrawal probably suggests bad sponsorship quality, causing investors to worry about the accounting information quality of related firms and driving related firms’ stock prices down during the window period. The empirical results show that the CAR of related firms declines and is significantly lower than that of unrelated firms during the event window, which confirms the contagion effect
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