Underwriters and the Performance of Second-time IPO Applicants: From the Perspective of Information Asymmetry, a paper co-authored by our school’s Professor Zhang Xueyong, PhD student Chen Ran and Associate Professor Wei Xu, was published in the 2020 1st Issue of Economic Research Journal.
This paper specifically studies second-time IPO applicants after they were rejected by the Public Offering Review Committee (“PORC”) of the China Securities Regulatory Commission, and investigates their market performance after listing based on data about listed A-share companies in 2004-2017. During this period, of all 2,572 IPO applicants, as many as 506 were rejected by the PORC. Among which, 227 re-filed their IPO applications and 196 successfully pulled off a listing.
Current research on the performance of second-time IPO applicants is mainly concentrated on the US stock market. But given the different IPO regulations adopted by China and the United States, such research is not necessarily applicable to second-time IPO applicants in China’s A-share market. Different from America’s registration system, China’s approval system emphasizes substantive regulation, which means deciding whether a company meets the criteria for securities offering through substantive reviews. And regulators have the right to reject IPO applicants that fail to meet relevant criteria. Therefore, American companies can choose whether to withdraw their applications according to their own and market conditions, which is a kind of market behavior based on the registration system. Nevertheless, second-time IPO applicants in China cannot but terminate their application for failing to pass the review of the PORC, which is a kind of administrative behavior based on the approval system. On such a basis, this paper aims to look at the performance of second-time IPO applicants after listing in China’s A-share market from the perspective of information asymmetry, and fill in the gap of absence of relevant research at home. Moreover, it studies the role of underwriters during this process based on the characteristics of the approval system, and analyzes the effect of securities offering regulations on the performance of IPOs.
Firstly, by building a theoretical model, it shows that second-time IPO applicants can lower the degree of information asymmetry by changing underwriters with higher reputation to boost their success rate, reduce the IPO underpricing rate, and enhance the long-term performance of their share prices after listing. Secondly, the result of empirical research shows that in comparison with first-time IPO applicants, the underpricing rate, rate of excessive funds raised, first-day turnover rate and disagreement among investors of second-time applicants are lower, along with higher long-term returns. This indicates that the degree of information asymmetry of second-time IPO applicants is indeed lower. Further research shows that choosing underwriters with higher reputation is a key way for second-time IPO applicants to mitigate information asymmetry, which is in line with theoretical studies. Lastly, under the approval system, companies that were vetoed during first-time IPO application due to substantive review-related issues tend to resort to underwriters with political connections to successfully stage a comeback, but without lowering the degree of information asymmetry. This points to the necessity of implementing the registration system.
Overall, this paper makes the following contributions and innovation. First, it targets a special group in the securities market - second-time IPO applicants, analyzes the effect of rejection of first-time applications on the performance of second-time applicants after listing, and finds that two rounds of review can mitigate the issue of information asymmetry for second-time applicants. Second, it explains the performance of second-time IPO applicants after listing from the perspective of replacement of underwriters, and analyzes whether the selection of higher-reputation underwriters can help mitigate information asymmetry for second-time applicants. Third, based on the characteristics of the approval system and analysis of the reasons why first-time IPO applicants are rejected, it looks into the role of underwriters’ political connections and the effect of the approval system on the offering market. The policy implication of the paper lies in that it takes a forward-looking view of the ongoing IPO registration system reform, which can boost the quality of information disclosure, underline the duties of underwriters as intermediaries, highlight the leading role of markets in pricing share offerings, weaken government controls, let the “invisible hand” to pick high-quality listed companies, and provide open and transparent listing opportunities to more premium companies.
