Chinese Initial Public Offerings Research Articles

Research on the Role of Investment Banks in the China’s IPO Market

Investment banks are essential players in today's dynamic capital market, serving as intermediaries that facilitate a wide range of financial activities crucial for economic growth and development. These activities encompass venture capital, project financing, mergers and acquisitions, corporate restructuring, securities issuance, and investment analysis. Investment banks must establish robust developmental frameworks and adapt to changing industry dynamics to remain effective and resilient in the face of evolving economic and financial landscapes. This research explores the role played by investment banks in the Chinese Initial Public Offering (IPO) market while considering the nation's historical context. China's financial evolution has been marked by unique historical events and economic reforms, which have significantly influenced its IPO market and the involvement of investment banks. Examining the interplay between these factors is vital for understanding the broader dynamics of the global financial system. It provides valuable insights into the strategies and adaptations required for investment banks to thrive in this complex environment. This study aims to contribute to the existing body of knowledge and inform industry stakeholders, policymakers, and investors about the intricacies of investment banking in China's IPO market.

IPO Fund Raising and Chinese Markets IPO Suspension

During the period spanning from 2007 to 2021, China had substantial increase in its Gross Domestic Production (GDP). However, it is noteworthy that this rise was not mirrored by a commensurate expansion in China's A-share market. When examining the performance of China's stock market in relation to other major global economies within the same time frame, it becomes evident that the overall returns of China's stock market are comparatively lower. For example, Standard & Poors 500 increased 236.11%, Nasdaq Composite Index increased 547.75%, the German Stock Index 30 increased 109.99%, and Nikkei Stock Average (Nikkei 225) increased 66.21%, whereas Shanghai Stock Exchange Composite Index increased 33.41%. Based on the monthly Initial Public Offering (IPO) proceeds of China's stock market from 2007 to 2021, this paper comprehensively examines the impact of IPO activities on China's stock market, including the correlation coefficients among IPO fundraised, index amplitude, index return, and GDP. By studying the correlation between the Chinese All-securities Index (CSI) data and IPO fundraising, as well as exploring the impact of policy changes on the market, it can be concluded that IPO fundraising itself has a limited impact on market returns. The low yield in China's country's stock market might be due to corporate information asymmetry, corporate information fraud, and imperfect supervision. The contributions of this paper include the summary and interpretation of China's IPO and related data, the interpretation of China's IPO reform and other policy actions, and the suggestions for the future development direction of China's market.

Narcissistic managers and IPO underpricing

Using hand-collected data on the signature size of managers in Chinese initial public offerings (IPOs) from 2007 to 2019 as a proxy for managerial narcissism, we examine how IPOs with narcissistic managers (narcissistic IPOs) affect IPO underpricing. The findings suggest that narcissistic IPOs have higher underpricing than non-narcissistic IPOs. Specifically, we find that on average, a narcissistic IPO exhibits approximately 11.3% higher underpricing than a median IPO firm. Our results are robust to alternative metrics of narcissism and underpricing after controlling for endogeneity. Additional analyses suggest that narcissistic IPOs are more likely to engage in earnings management than non-narcissistic IPOs. The former exhibits excessive risk-taking behavior, gauged by earnings volatility pre-IPO and a higher beta post-IPO. In the cross-sectional analyses, we document that the impact of managerial narcissism on IPO underpricing is more salient for IPOs facing unsophisticated investors, high market sentiment, or poor corporate governance.

Timeliness of technological innovation and decisions of IPO timing and pricing

This study builds a theoretical model, empirically testing the impact of timeliness value of technological innovation on initial public offering (IPO) timing and underpricing based on Chinese IPO. And a posteriori study is conducted from the two perspectives of growth value and competitive value in the product market after IPO. The results are as follows: (1) The greater the timeliness value of technological innovation, the more likely firms will go public early.(2) When firms go public early, the timeliness value of technological innovation will affect the ceiling of IPO underpricing that firms can bear, which means that the timeliness value of technological innovation is positively correlated with the degree of underpricing. (3) For firms that go public early with high IPO underpricing, the timeliness of technological innovation has a greater positive effect on the growth performance and competitiveness in the product market after IPO. Therefore, timeliness of technological innovation is more likely to be involved in firms’ decisions of going public early with high underpricing.

Cross-influence of information and risk effects on the IPO market: exploring risk disclosure with a machine learning approach.

The paper examines whether the structure of the risk factor disclosure in an IPO prospectus helps explain the cross-section of first-day returns in a sample of Chinese initial public offerings. This paper analyzes the semantics and content of risk disclosure based on an unsupervised machine learning algorithm. From both long-term and short-term perspectives, this paper explores how the information effect and risk effect of risk disclosure play their respective roles. The results show that risk disclosure has a stronger risk effect at the semantic novelty level and a more substantial information effect at the risk content level. A novel aspect of the paper lies in the use of text analysis (semantic novelty and content richness) to characterize the structure of the risk factor disclosure. The study shows that initial IPO returns negatively correlate with semantic novelty and content richness. We show the interaction between risk effect and information effect on risk disclosure under the nature of the same stock plate. When enterprise information transparency is low, the impact of semantic novelty and content richness on the IPO market is respectively enhanced.

Does a CEO's prior academic experience helpful to an IPO firm? The case of IPO discount

We examine the impact of having a chief executive officer (CEO) with prior academic experience on initial public offering (IPO) discount using a sample of Chinese IPOs. Our findings suggest that IPO firms with previous academic experience CEOs exhibit lower IPO discounts than those without such experience. The results are robust and economically significant. Additional analysis indicates that a firm's information asymmetry level mediates the impact of CEO academic experience on IPO discount and thus supports the notion that a CEO's prior academic experience helps lower the IPO firm's information asymmetry.

The Effects of Privatization of State-Owned Enterprises on IPO Firms’ Initial and Long-term Returns

Purpose - The purpose of this study was to examine the effects of privatization of Chinese state-owned enterprises (SOEs) on their initial returns and long-term performance after initial public offering(IPO). Design/methodology/approach - This study used 1,599 Chinese IPO firms, some of which were SOEs. The multivariate regression analyses were implemented to analyze their effects. Findings - First, the privatization of SOEs does not have any statistically significant effect on the initial return of IPO firms. Second, the shareholdings of government prior to IPOs for both privatizing of SOEs and non-privatizing firms and for both exchanges of Shanghai and Shenzhen have a statistically significant positive effect on the initial return of IPO firms. Third, the privatization of SOEs has statistically significant negative effect on the long-term returns of IPO firms. Fourth, the state-shareholdings prior to IPOs have statistically significant negative effects on the long-term return of IPO firms. Fifth, the state-shareholdings of the privatizing SOEs prior to IPOs have statistically significant positive effects on the long-term return of IPO firms. Research implications or Originality - The results imply that the higher shareholdings and ownership of the Chinese government on SOEs reduce the information asymmetry for the investors of IPO shares or maybe due to inefficiency of SOEs prior to IPOs lead to lower offer prices or higher opening prices leading to severe underpricing and relatively lower stock market returns in the long-run both for the privatizing firms and for the higher state-shareholding firms, while both factors interactively improve their long-term stock market returns.

A new Markov regime‐switching count time series approach for forecasting initial public offering volumes and detecting issue cycles

AbstractThis study proposes a novel Markov regime‐switching negative binomial generalized autoregressive conditional heteroskedasticity model for analyzing count data time series. We develop a likelihood‐based method for parameter estimation and give the one‐step‐ahead forecasting algorithms for the mean, variance, and quantiles. An empirical analysis of both the U.S. initial public offering (IPO) and Chinese A‐share IPO markets indicates that our method is very efficient in forecasting monthly IPO volumes and detecting hot/cold issue markets. The first‐day IPO return is positively correlated with the IPO volume in a hot issue market but negatively correlated with the IPO volume in a cold issue market, in both the U.S. and Chinese IPO markets. However, the average first‐day return in the previous hot issue market has a significant positive impact on the current IPO volume for only the U.S. IPO market. Our approach helps to more accurately model and understand the behavior of hot/cold IPO issue markets.

Financial wealth, socioemotional wealth, and founder exits: an empirical examination of Chinese IPOs

ABSTRACT Initial public offerings (IPOs) are typically viewed as the peak of entrepreneurial success, providing founder-CEOs a chance to profitably exit. Founder-CEOs, however, are often motivated by non-financial considerations in addition to the desire to amass wealth. According to the behavioral agency model, the founder-CEOs’ framing of gains vs. losses of their wealth creation at IPO determines their risk aversion vs. risk taking behaviors. In addition, the behavioral agency model argues that founder-CEOs with a great deal of socioemotional wealth fear losing that wealth. This fear will attenuate their aversion to losing financial wealth. To test our model, we collected a sample of 130 entrepreneurial IPOs from 2004 to 2009 in China whose founder-CEOs left the firm after it went public. The results confirm a U-shaped relationship between the founder-CEOs’ financial wealth and their exit speed after the IPO. A high level of socioemotional wealth, exemplified by the CEOs’ tenure, a higher ratio of insiders on the board, and the age of the stock market, negatively moderates the effect of financial wealth. We contribute to the literature by providing empirical support for the behavioral agency model and founder-CEO exits in China by examining both financial and socioemotional wealth.

How home country identity salience affects emerging market companies' overseas IPO performance: an empirical investigation from China

PurposeThe purpose of the current study is to examine how and when home country identity salience of emerging market companies affects their overseas initial public offering (IPO) performanceDesign/methodology/approachBy using secondary data from multiple sources, this study empirically tests the proposed research framework in the context of Chinese companies' overseas IPO activities in the US stock markets.FindingsThe results demonstrate that home country identity salience positively affects overseas IPO performance, and thus can be recognized as the asset of foreignness. Cultural specification positively moderates the effect of home country identity salience on overseas IPO performance. Market internationalization also plays an important moderating role in the relationship between home country identity salience and overseas IPO performance.Originality/valueThe current study identifies a new factor, that is, home country identity salience, that can mitigate the liability of foreignness for emerging market companies in their overseas IPO activities. The study also documents the positive cultural impacts on overseas investors in a financial and international context.

Fuzzy regression model for forecasting impact of venture capital network and underwriter network on IPO premium

In recent years, social network analysis is one of the top 20 fields of artificial intelligence. Based on the network signal theory, this study examines the influence of the dual network embeddedness on the premiums of Chinese initial public offerings (IPOs). In this paper we proposed fuzzy regression model for forecasting the impact of venture capital network and underwriter network on IPO premium based on some hypothesis. We find that: (1) Enterprises embedded in the central position of venture capital network will increase the IPO secondary market premium; (2) Secondly, employing underwriter in the central position of underwriting network will increase the IPO secondary market premium; (3) As venture capital are getting closer to the central position of venture capital network, the influence of underwriter network centrality in underwriting network on the increase of IPO secondary market reaction will gradually weaken. The research shows that occupying central position both in venture capital syndication network and underwriting network have the functions of sending signals, then increase the IPO secondary market premium, but the functions of different network signals will replace each other.

Geographic distance, firm affiliations, and IPO performance: evidence from China

ABSTRACT Firms going through an initial public offering (IPO) face many uncertainties. Geographic distance between the firm headquarters and the major financial centers, where most investors are located, is another concern. Using a sample of 688 Chinese initial public offerings between 2005 and 2012, we find that remote firms leave investors informationally disadvantaged leading firms to underprice their offering to a greater extent. Furthermore, we find that business affiliations (prestigious lead underwriters and government), which signal firm quality, lessen and the effect of geographic distance on underpricing. Thus, in an IPO context, signals have increasing value for more geographically isolated firms wishing to maximize initial public offering performance. Our study has implications for both academics and practitioners by offering new insights on how geographic distance and signals impact IPO performance.

The Effects of Income Inequality and OFDI on Underpricing and Underperformance of Chinese IPO Firms

Purpose - This study examines whether the underpricing of initial public offerings (IPOs) and the long-term performance of IPO firms in the Chinese market are affected by income inequality between firms or regions and the OFDI (OFDI) of firms. Design/Methodology/Approach - We introduce inequality and OFDI in the models to conduct multivariate regressions. Using 1,503 IPO firms listed on the Shanghai Exchange and Shenzhen Exchange from 2003 to 2015 and financial and regional data extracted from a merged dataset from the RESSET and China Stock Market & Accounting Research (CSMAR) databases, we measure the relative Gini index and initial returns to test IPO underpricing markets and test long-term underperformance using long-term cumulative abnormal returns (LCAR) and long-term buy-and-hold (LBHAR) in the regression analyses. Findings - The Gini coefficients of firms in China show a positive effect on IPO underpricing for all sample and for both stock exchange samples, separately. They also show a positive effect on IPO underpricing by OFDI firms in all sample and separately for each sample. In addition, the Gini coefficients of provinces in China also show a positive effect on IPO underpricing in all sample and each stock exchange sample, separately. They also show a positive effect on IPO underpricing by OFDI firms in all sample and in both samples, separately. Based on our examination of the effects of income inequality across regions and firms of IPO firms on underpricing and long-term financial performance, we have verified more severe IPO underpricing and negative effects on the long-term stock market price. Research Implications - Our findings regarding the effect of income inequality across firms and regions, which is found to be severe in China and of major concern, on the initial pricing of IPO firms under the influence of the China Securities Regulatory Commission (CSRC) or government policies and their long-term performance in the stock market are generally consistent with prior conjectures that the Chinese government or firms attempt to alleviate income inequality during and after an IPO for firms in regions with severe inequality. Further study on the causes of income inequality for different regions and industries and its change over time is required in future studies.

Are institutional investors subject to gambling preference? Evidence from detailed investor bids of IPO auctions in China

ABSTRACT Using a unique disclosure database of institutional investor bidding information in Chinese initial public offerings (IPOs), we examine the preference for lottery-like IPO shares of institutional investors. We document that IPOs with higher expected skewness have higher institutional bidding prices and higher offline oversubscription ratio. The effect is stronger for sub-samples with higher investor sentiment and IPOs with higher valuation uncertainty. Moreover, higher expected skewed IPOs experience higher issue prices and initial returns but lower long run returns. These results show that institutional investors have gambling preference for IPO investments and the expected skewness of returns explain institutional bidding prices.

Volatile market condition, institutional constraints, and IPO anomaly: evidence from the Chinese market

AbstractWe provide a holistic view of factors affecting IPO underpricing and aftermarket trading of Chinese initial public offerings (IPOs) over 23 years. The subscription ratio and offer amount are among the top three most important determinants of underpricing when stock markets are less volatile. However, the recent IPOs’ initial return and institutional constraints on offer price and aftermarket trading price are the driving forces in volatile markets. The underpricing (the first‐day trading price limit) is the most important factor affecting IPO aftermarket trading when stock markets are less (more) volatile, suggesting how factors affect IPO underpricing and aftermarket trading depends on stock market conditions.

Redistribute the Wealth! Chinese IPO Market Reforms

Under market socialism, how much economic efficiency is lost in the pursuit of political objectives? We estimate that between January 2014 and July 2020, price controls in the Chinese initial public offering (IPO) market have transferred RMB 1.3 trillion (USD 203 billion) of wealth from firms to investors. On average, firms receive only 40.6% of the full market value of their shares. The majority of the wealth transferred (88.5%) has been dispersed via lottery to the general investing public, in which wealthier investors (in expectation) receive a larger share of the wealth transfer. The remaining wealth transfer is allocated to institutional investors and private individuals who bypass the lottery system.

Provincial economic performance and underpricing of IPOs: Evidence from political interventions in China

We examine the underpricing of 2,131 Chinese initial public offerings (IPOs) between 2005 and 2017. The results indicate that state-owned enterprises (SOEs) controlled by the local government (local SOEs) offer significantly higher underpricing when they go public than SOEs controlled by the central government and non-SOEs do. This phenomenon is evident for local SOEs from less developed provinces, after controlling for the direct effect of regional economic performance. These results suggest local government officials underprice initial public offerings to make regional companies successfully go public to promote the regional economy.

The impact of corporate political connections and executive’s international experience on Chinese firms’ initial public offerings in the USA

PurposeIntegrating social network theory with signaling theory, the purpose of this research is to examine the impact of corporate political connections and executive’s international experience on Chinese firms initial public offerings (IPOs) performance in the USA.Design/methodology/approachThis study used Securities Data Company (SDC) New Issues database to identify all Chinese firms that went public in the USA between 2003 and 2014. Consistent with previous research, IPO firms excluded from the sample include merger or acquisitions, spin-offs and initial stage listed firms. The final sample size is of 142 Chinese foreign IPOs in the US markets.FindingsThis study finds that firms with political connections perform significantly poor than firms without political connections. It shows that US stock markets react to the signals of political connections of Chinese foreign IPOs. In response, the Chinese foreign IPOs can signal international work experience of top executives to US investors. The results show that the executives’ international work experience has significant positive relationships on foreign IPO performance of Chinese firms. Moreover, this study finds that the interaction between corporate political connections and international experience pursues positive effects on the performance of foreign IPOs.Originality/valueThis research intends to extend the knowledge of how corporate political connections and international work experience affects the performance of Chinese firms attempting to access US capital markets. To date, scholars have not investigated the influence of corporate political connections on the amount of capital raised by foreign IPOs.

Signaling value of top management team

PurposeThe purpose of this paper is to integrate the upper echelon theory with signaling theory and examine the impact of top management team (TMT) on the initial public offering (IPO) performance of Chinese firms in the USA.Design/methodology/approachThis study used Security Data Corporation (SDC) that is a central database for foreign IPOs in the USA. The authors identified 142 Chinese firms that issued stocks on the US markets between 2003 and 2014. This study used firm’s final prospectuses to collect data manually.FindingsThis study finds that the TMT characteristics such as functional heterogeneity and international exposure convey the positive signal of firm’s legitimacy to the US investors and increase the IPO performance.Originality/valueThis study extends the upper echelon perspective that has previously overlooked the signaling value of TMT characteristics in the foreign IPO studies. The top management plays an important role to the firm’s successful foreign market listing. Since China joined the WTO in 2001, a large number of Chinese firms have started IPOs in the USA, but there is a dearth of research on these firms. This study aims to contribute to the study of international business and management and describes that the TMT functional heterogeneity and international exposure have a significant role in the success of Chinese foreign IPOs.

How Did the Elimination of the Window Guidance Policy Affect IPO Performance in China? A Stochastic Dominance Analysis

ABSTRACT This study uses data on all initial public offerings (IPO) listed on the three boards in China’s stock markets to investigate overpricing in the Chinese IPO market from 2009 to 2013, which was the only period during which the “window guidance” policy was suspended in China. We use stochastic dominance tests to compare IPO performance to that of corresponding market indexes and to test whether the policy change addresses earlier problems of underpricing. The results indicate that the Chinese IPO market is extremely overpriced, and on average IPOs perform worse than the secondary market, which implies that investors who invest in newly listed IPOs have a higher likelihood of losing money than they would by investing in the secondary market.