Credit scores and the performance of newly-listed stocks: an exploration of the Chinese A-share market

Original Research
First Online:
  • 112 Downloads

Abstract

This study assesses the power of S&P Global Market Intelligence’s CreditModel (CM) scores in explaining the short- and long-run performance of newly-listed Chinese firms. A unique feature of the data arises from such scores being outside the public domain during the study period. Focus on such a period avoids the signalling and self-selection biases that inevitably plague studies delving into the relevance of publicly-announced credit ratings. We find that CM scores exhibit positive association with post-listing buy-and-hold stock returns. Even stronger associations emerge when considering fundamental accounting performance, especially over longer-run horizons. In respect of the listing of Chinese A-share firms, we conjecture that greater alignment between secondary market prices and fundamentals would likely have arisen had such scores been in the public domain during the study period.

Keywords

Credit score IPO pricing Post IPO performance 

JEL Classification

G24 G31 
This is a preview of subscription content, log in to check access.

Notes

Acknowledgements

We thank S&P Global Market Intelligence for the provision of Credit Model (CM) scores necessary for the completion of this study. This project developed from a request by S&P in February 2014 to assess the power of CM scores in explaining post-IPO performance. Our investigation offers a framework for assessing this question as well as other related themes. We assert that no pecuniary benefit was received from the data supplier for our work, and that our research on the pricing, performance and other effects of the scores was carried-out independently of the data supplier. But we especially thank Clemens Thym, Michelle P. Cheong and Phillip Lee of S&P Global Market Intelligence for earlier discussions, suggestions and input in relation to data queries and CM score construction. Additionally, we express thanks to Daniel Chan and Jack Wong. We also thank an anonymous reviewer for comments rendered on an earlier draft of this paper.

References

  1. Ahrony J, Jevons-Lee CW, Wong TJ (2000) Financial packaging of IPO firms in China. J Account Res 38(1):103–126CrossRefGoogle Scholar
  2. Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Finance 23(4):589–609CrossRefGoogle Scholar
  3. An A, Chan KC (2008) Credit ratings and IPO pricing. J Corp Finance 14:584–595CrossRefGoogle Scholar
  4. Ball R, Shivakumar L (2008) Earnings quality at initial public offerings. J Account Econ 45:324–349CrossRefGoogle Scholar
  5. Bannier CE, Behr P, Guttler A (2010) Rating opaque borrowers: why are unsolicited ratings lower? Rev Finance 14:263–294CrossRefGoogle Scholar
  6. Barry CB, Muscarella CJ, Peavy JW, Vetsuypens MR (1990) The role of venture capital in the creation of public companies. J Financ Econ 27:447–471CrossRefGoogle Scholar
  7. Beatty RP, Ritter JR (1986) Investment banking, reputation, and the underpricing of initial public offerings. J Financ Econ 15:213–232CrossRefGoogle Scholar
  8. Boulton TJ, Smart SB, Zutter CJ (2010) IPO underpricing and international corporate governance. J Int Bus Stud 41:206–222CrossRefGoogle Scholar
  9. Bradley DJ, Jordan BD (2002) Partial adjustment to public information and IPO underpricing. J Financ Quant Anal 37:595–616CrossRefGoogle Scholar
  10. Byoun S, Fulkerson JA, Han SH, Shin YS (2014) Are unsolicited ratings biased? Evidence from long-run stock performance. J Bank Finance 42:326–338CrossRefGoogle Scholar
  11. Cai X, Liu G, Mase B (2008) The long-run performance of initial public offerings and its determinants: the case of China. Rev Quant Finance Account 30(4):419–432CrossRefGoogle Scholar
  12. Cao J, Leng T, Liu B, Megginson W (2016) Institutional bidding in IPO allocation: evidence from China. AFA/ASSA Meeting, 3–5 January 2016, San Francisco. https://www.aeaweb.org/conference/2016/retrieve.php?pdfid=1537
  13. Carter R, Manaster S (1990) Initial public offerings and underwriter reputation. J Finance 45:1045–1067CrossRefGoogle Scholar
  14. Chan KC, Lo YL (2011) Credit ratings and long term IPO performance. J Econ Finance 35:473–483CrossRefGoogle Scholar
  15. Chan K, Wang JB, Wei KC (2004) Underpricing and long-term performance of IPOs in China. J Corp Finance 10(3):409–430CrossRefGoogle Scholar
  16. Chen G, Firth M, Kim JB (2000) The post-issue market performance of initial public offerings in China’s new stock markets. Rev Quant Finance Account 14(4):319–339CrossRefGoogle Scholar
  17. Chen J, Marshall BR, Zhang J, Ganesh S (2006) Financial distress predictions in China. Rev Pac Basin Financ Mark Policies 9(2):317–336CrossRefGoogle Scholar
  18. Cheng M, Subramanyam KR (2008) Analyst following and credit ratings. Contemp Account Res 25(4):1007–1043CrossRefGoogle Scholar
  19. Cheung YL, Ouyang Z, Tan W (2009) How regulatory changes affect IPO underpricing in China. China Econ Rev 20:692–702CrossRefGoogle Scholar
  20. Chi J, Padgett C (2005a) Short-run underpricing and its characteristics in Chinese initial public offering markets. Res Int Bus Finance 19(1):71–93CrossRefGoogle Scholar
  21. Chi J, Padgett C (2005b) The performance and long-run characteristics of the Chinese IPO markets. Pac Econ Rev 10(4):451–469CrossRefGoogle Scholar
  22. Chi J, Wang C, Young M (2010) Long-run outperformance of Chinese initial public offerings. Chin Econ 43(5):62–88CrossRefGoogle Scholar
  23. Chou T-K (2013) Information content of credit ratings in pricing of future earnings. Rev Quant Finance Account 40:217–250CrossRefGoogle Scholar
  24. Deb SS, Marisetty VB (2010) Information content of IPO grading. J Bank Finance 2010(34):2294–2305CrossRefGoogle Scholar
  25. Doumpos M, Niklis D, Zopoundis C, Andrioopoulos K (2015) Combining accounting data and a structural model for predicting credit ratings: empirical evidence from European listed firms. J Bank Finance 50:599–607CrossRefGoogle Scholar
  26. DuCharme LL, Malatesta PH, Sefcik SE (2001) Earnings management: IPO valuation and subsequent performance. J Account Audit Finance 16(4):369–396CrossRefGoogle Scholar
  27. Fan JP, Wong TJ, Zhang TY (2007) Politically connected CEOs, corporate governance, and post-IPO performance of China’s newly partially privatized firms. J Financ Econ 84(2):330–357CrossRefGoogle Scholar
  28. Gao Y (2010) What comprises IPO initial returns: evidence from the Chinese market. Pac Basin Finance J 18:77–89CrossRefGoogle Scholar
  29. Gounopoulos D, Guney Y, Xu T (2013) Do credit ratings affect underpricing and volatility? Evidence from Chinese IPOs. Unpublished manuscript. http://www.fma.org/Luxembourg/Papers/CreditRatingChineseIPOs.pdf
  30. Guo H, Brooks R (2008) Underpricing of Chinese A-share IPOs and short-run underperformance under the approval system from 2001 to 2005. Int Rev Financ Anal 17(5):984–997CrossRefGoogle Scholar
  31. Habib MA, Ljungqvist AP (2001) Underpricing and entrepreneurial wealth losses in IPOs: theory and evidence. Rev Financ Stud 14:433–458CrossRefGoogle Scholar
  32. Ibbotson RG, Jaffe JF (1975) “Hot issue” markets. J Finance 30(4):1027–1042Google Scholar
  33. Jacob J, Agarwalla SK (2012) Mandatory IPO grading: does it help pricing efficiency? Indian Institute of Management, Ahmedabad. Working paper 2012–12–07, December 2012Google Scholar
  34. James C, Wier P (1990) Borrowing relationships, intermediation, and the cost of issuing public securities. J Financ Econ 28(1–2):149–171CrossRefGoogle Scholar
  35. Jiang P, Cai C, Keasey K, Wright M, Zhang Q (2014) The role of venture capitalists in small and medium enterprises IPOs: evidence from China. Int Small Bus J 32(6):619–643CrossRefGoogle Scholar
  36. Kao JL, Wu DH, Yang ZF (2009) Regulations, earnings management, and post-IPO performance: the Chinese evidence. J Bank Finance 33(1):63–76CrossRefGoogle Scholar
  37. Kisgen DJ (2006) Credit ratings and capital structure. J Finance 61(3):1035–1072CrossRefGoogle Scholar
  38. Kuo HC, Wang L-H, Sheu H-J, Li FK (2003) Credit evaluation for small and medium-sized enterprises by the examination of firm specific financial ratios and non-financial variables: evidence from Taiwan. Rev Pac Basin Financ Mark Policies 6(1):5–20CrossRefGoogle Scholar
  39. Leland H, Pyle D (1977) Information asymmetries, financial structure and financial intermediation. J Finance 32:371–387CrossRefGoogle Scholar
  40. Liu Y, Malatesta P (2005) Credit ratings and the pricing of seasoned equity offerings. Unpublished manuscript, 2005. http://www.bm.ust.hk/fina/FinanceSymposium/2005Symposium/Papers/PaulMalatesta.pdf
  41. Mansi SA, Maxwell WF, Miller DP (2011) Analyst forecast characteristics and the cost of debt. Rev Acc Stud 16:116–142CrossRefGoogle Scholar
  42. McGuinness PB (2012) The role of ‘cornerstone’ investors and the Chinese state in the relative underpricing of state- and privately-controlled IPO firms’. Appl Financ Econ 22(18):1529–1551CrossRefGoogle Scholar
  43. McGuinness PB (2016) Post-IPO performance and its association with subscription cascades and issuers’ strategic-political importance. Rev Quant Finance Account 46(2):291–333CrossRefGoogle Scholar
  44. Megginson WL, Weiss KA (1991) Venture capitalist certification in initial public offerings. J Finance 66(3):879–903CrossRefGoogle Scholar
  45. Merton R (1987) A simple model of capital market equilibrium with incomplete information. J Finance 62(3):483–510CrossRefGoogle Scholar
  46. Ohlson JA (1980) Financial ratios and the probabilistic prediction of bankruptcy. J Account Res 18(1):109–131CrossRefGoogle Scholar
  47. Pan L-H, Lin C-T, Lee S-C, Ho K-C (2015) Information ratings and capital structure. J Corp Finance 31:17–32CrossRefGoogle Scholar
  48. Poon WP-H, Chan KC (2008) An empirical examination of the informational content of credit ratings in China. J Bus Res 61:790–797CrossRefGoogle Scholar
  49. Poon WP-H, Chan KC, Firth MA (2013) Does having a credit rating leave less money on the table when raising capital? A study of credit ratings and seasoned equity offerings in China. Pac Basin Finance J 22:88–106CrossRefGoogle Scholar
  50. Purnanandam AK, Swaminathan B (2004) Are IPOs really underpriced? Rev Financ Stud 17(3):811–848CrossRefGoogle Scholar
  51. Ritter J (1984) The “Hot Issue” market of 1980. J Bus 57:215–240CrossRefGoogle Scholar
  52. Song S, Tan J, Yi Y (2014) IPO returns in China: underpricing or overvaluation? China J Account Res 7:31–49CrossRefGoogle Scholar
  53. Sun Q, Tong HS (2003) China share issue privatization: the extent of its success. J Financ Econ 70(2):183–222CrossRefGoogle Scholar
  54. Teoh SH, Welch I, Wong TJ (1998) Earnings management and the long-run market performance of initial public offerings. J Finance 53:1935–1974CrossRefGoogle Scholar
  55. Thomadakis S, Nounis C, Gounopoulos D (2012) Long term performance of Greek IPOs. Eur Financ Manag 18(1):117–141CrossRefGoogle Scholar
  56. Tian L (2011) Regulatory underpricing: determinants of Chinese extreme IPO returns. J Empir Finance 18(1):78–90CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  • Charlie X. Cai
    • 1
  • Paul B. McGuinness
    • 2
  • Qi Zhang
    • 3
  1. 1.Management SchoolUniversity of LiverpoolLiverpoolUK
  2. 2.Department of Finance, CUHK Business SchoolThe Chinese University of Hong KongSha TinHong Kong
  3. 3.Business SchoolDurham UniversityDurhamUK

Personalised recommendations