Yamin Xie, Zhichao Li, Wenjing Ouyang and Hongxia Wang
Political factors play a crucial role in China's initial public offering (IPO) market due to its distinctive institutional context (i.e. “economic decentralization” and “political…
Abstract
Purpose
Political factors play a crucial role in China's initial public offering (IPO) market due to its distinctive institutional context (i.e. “economic decentralization” and “political centralization”). Given the significant level of IPO underpricing in China, we examine the impact of local political uncertainty (measured by prefecture-level city official turnover rate) on IPO underpricing.
Design/methodology/approach
Using 2,259 IPOs of A-share listed companies from 2001 to 2019, we employ a structural equation model (SEM) to examine the channel (voluntarily lower the issuance price vs aftermarket trading) through which political uncertainty affects IPO underpricing. We check the robustness of the results using bootstrap tests, adopting alternative proxies for political uncertainty and IPO underpricing and employing subsample analysis.
Findings
Local official turnover-induced political uncertainty increases IPO underpricing by IPO firms voluntarily reducing the issuance price rather than by affecting investor sentiment in aftermarket trading. These relations are stronger in firms with pre-IPO political connections. The effect of political uncertainty on IPO underpricing is also contingent upon the industry and the growth phase of an IPO firm, more pronounced in politically sensitive industries and firms listed on the growth enterprise market board.
Originality/value
Local government officials in China usually have a short tenure and Chinese firms witness significantly severe IPO underpricing. By introducing the SEM model in studying China IPO underpricing, this study identifies the channel through which local government official turnover to political uncertainty on IPO underpricing.
Details
Keywords
Zhijun Yan, Roberta Bernardi, Nina Huang and Younghoon Chang