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Diversification of pre-IPO ownership and foreign IPO performance

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Abstract

We examine the diversification of pre-IPO ownership of foreign-listed firms and how the presence of pre-IPO shareholders from the host country affects foreign issuer’s subsequent IPO and post-IPO activities. Using a sample of foreign-listed Chinese firms, we find that the presence of pre-IPO shareholders from the host country is associated with a significant reduction in direct and indirect IPO costs, especially for issuers without international sales and for firms operating at a loss. Benefits of such pre-IPO affiliation persist into the post-IPO period as manifested in greater analyst coverage and better acquisition performance in the host country. Our paper provides new insight on the value of pre-IPO ownership diversification and identifies one strategy that firms can use to overcome the liability of foreignness.

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Notes

  1. Claessens et al. (2006) suggest that better economic fundamentals for a country such as higher income and growth opportunities are associated with more internationalization of the firms including listing, trading and capital raising in international exchanges.

  2. Despite of rapid economic development, China’s capital markets remain tightly regulated by the government. IPOs are subject to approval by the China Securities Regulatory Commission (CSRC). Approximately 80 % of firms listed on the mainboard (A-share market) are state-owned-enterprises (SOEs). Domestic IPO option is limited for private firms as few of them are able to meet the stringent criteria for listing on the mainboard. The situation is gradually improved after the launch of the Small-and-Medium Enterprise (SME) Board in 2004 and the ChiNext board in 2009, respectively. Nevertheless, as Chinese government maintains a tight grip on supply concerns, slow approval process has resulted in a mounting backlog of IPO applications. Over 800 Chinese companies were seeking approval for a domestic listing at the end of 2012, resulting in a waiting period of approximately 5 years. See Reuters’ article at http://www.reuters.com/article/2012/12/18/china-ipo-idUSL4N09S2ZV20121218.

  3. See CNBC article at http://www.cnbc.com/id/39909357/Chinese_IPOs_Top_NASDAQ039s_Foreign_Market.

  4. Examples include China Unicom (NYSE Ticker: CHU), Yanzhou Coal Mining Co. Ltd (NYSE Ticker: YZC), Sinopec Shanghai Petrochemical Co. Ltd (NYSE Ticker: SHI).

  5. Available at http://www.sgx.com.

  6. Pursuant to AIM Rule 26, all companies listed on AIM must disclose admission documents on their website.

  7. We investigated the reason of missing prospectus for the 54 firms. 23 firms were due to change of listing location (for example, the firm delisted from UK via privatization and subsequently re-listed in HK, so UK stock exchange took the firm’s IPO prospectus off). 18 firms were delisted from the stock exchange but have not been re-listed anywhere else as of sample collection year. The remaining 13 firms are missing prospectus for reasons unknown. To alleviate the concern of neglected selection bias that could potentially influence our conclusion, we compared the IPO performance and financial characteristics of these 54 firms to our sample firms. The two groups of firms exhibited similar characteristics in most cases (except firm age where our sample firms are on average older than those 54 firms).

  8. Section heading varies by company. Other headings include “Shareholders”, “Substantial Shareholders”, “Principal Shareholders” etc.

  9. This phenomenon of industry concentration may be explained by different investor preference and risk tolerance level in each IPO market. For example, Nasdaq is dominated by high-tech stocks where investors are more willing to overlook current low or even negative profitability of IT companies and bet in their long-term vitality, and grant them a higher valuation.

  10. See, Rosenbaum and Rubin (1983) and Lemmon and Roberts (2010), for a more detailed discussion of the matching method and cautionary notes.

  11. Eng and Lin (2012) compare the accounting quality of Chinese firms that are cross-listed in the U.S., Hong Kong with those that are listed domestically. They find that firms from China do not have better reporting quality when they cross-list in the United States.

  12. In untabulated tests, we also calculate cumulative abnormal returns on the basis of monthly stock returns starting from the second and third month after the IPO date, respectively. Results remain qualitatively the same.

  13. In untabulated tests, we also use the CSRP equally-weighted index as the benchmark to adjust the three-year holding period returns. Results remain qualitatively the same.

  14. Compustat Global Index Prices (Straight Straits Times index—GVKEY 150067; FTSE World Index—GVKEY 150016).

  15. In untabulated tests, we conduct two additional robustness tests: (1) measure analyst forecast error using median earnings forecast instead of mean earnings forecast, and (2) deflate forecast error and dispersion by actual earnings instead of stock price. Empirical results remain qualitatively unchanged.

  16. In an untabulated test, we examine whether firms affiliated with local pre-IPO investors are more likely to initiate post-IPO acquisitions in the host country using a Logit model. The coefficient on the key variable of interest Local is 0.185 but insignificant (p value = 0.799).

  17. Another possible reason is that our sample of acquisitions is too small, which lacks the power to detect significant differences between VC and Non-VC investors.

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Acknowledgments

The author acknowledges helpful comments from Mark Humphery-Jenner, Hai Lu, Lisheng Yu, Tianyu Zhang and conference participants at the 26th Australasian Finance and Banking Conference and the 2013 Tsinghua Corporate Governance Conference. The author gratefully acknowledges the financial support of the National Natural Science Foundation of China (Projects 71002013 and 71372049) and the support of BNP Paribas-Tsinghua SEM Center for Globalization of Chinese Enterprises.

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    Ning Jia

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Jia, N. Diversification of pre-IPO ownership and foreign IPO performance. Rev Quant Finan Acc 48, 1031–1061 (2017). https://doi.org/10.1007/s11156-016-0577-x

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