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

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.

Appendices

Appendix 1: Variable definitions

PE_postIPO: :

Price to diluted earnings ratio post IPO

Initial underpricing (FUNDret): :

(Intrinsic value/IPO price) − 1

Intrinsic value is calculated as the value of the company imputed by the industry PE ratio.

Intrinsic value = Earnings before IPO*median industry PE ratio

Market reaction (MARKret)

[(First day closing price/intrinsic value) − 1] − Market return during the same day.

BHAR_ n: :

Abnormal buy-and-hold return from the second day after IPO to n trading days, as adjusted for contemporaneous market return

CAR_ n: :

Cumulative abnormal return from the second day after IPO to n trading days

CM

If CM_Score = ‘bb+’ or CM_Score = ‘bb’:

then score = 4

If CM_Score = ‘bb−’:

then score = 3

If CM_Score = ‘b+’:

then score = 2

If CM_Score = ‘b’ or CM_Score = ‘b−’:

then score = 1

CM1

If CM_Score = ‘bb+’ or CM_Score = ‘bb’:

then score = 3

If CM_Score = ‘bb−’:

then score = 2

If CM_Score = ‘b+’, ‘b’ or ‘b−’:

then score = 1

Ab_Day1_IPO: :

Abnormal return of the first day after IPO

Netproc_equity: :

Ratio of proceeds from new IPO shares to the RMB book value of assets just prior to IPO

Sentiment: :

Average initial return on all A-share IPOs within 30-day period prior to entity’s own IPO

Hot_Cold: :

Number of IPO within the 30-day period preceding a given entity’s IPO

Car_90: :

Cumulative abnormal return for the 90-day period leading-up to IPO (based on daily value-weighted market returns and reinvestment of cash dividends)

Issuer_Size: :

Logarithm of issuer’s market capitalization (=No. of shares outstanding*final offer price)

D_002: :

Equal to 1 if the issuer lists on the Shenzhen SME market; otherwise 0;

D_300: :

Equal to 1 if the issuer lists on the Shenzhen ChiNext market; otherwise 0;

Prestige: :

Number of IPOs the leading underwriter for the current IPO has conducted since market open divided by the total number of IPOs in the market from inception

D_range: :

Equal to 1 if the issuer has an offer price range; otherwise zero

State: :

Percentage of state owned shares (just prior to IPO)

LegalPerson: :

Percentage of legal person shares (just prior to IPO)

Leverage: :

Long term debt divided by equity (Just prior to IPO)

D_Growth_Ear: :

=1 if listing firm has positive growth in earnings over 3 years prior to IPO, otherwise 0

D_a to D_q: :

industry dummies (17 industry sector dummies but only 14 feature: industry codes j, k, p have no stocks in our sample)

ROA_b1 (or ROE_b1):

Return-on-assets (return-on-equity) for IPO firm for year-end immediately prior to IPO

Appendix 2

See Table 11.

Table 11 Basic statistics for regression variables