Competitive effects of IPOs: evidence from Chinese listing suspensions

Summary

Focus

We look at periods where all initial public offerings (IPOs) were suspended in China in order to assess the effect of IPOs on stock markets and individual listed firms.    

Contribution

Initial public offering (IPO) activity was suspended across the board three times in China between 2008 and 2015. This allows us to examine the effects of delays in IPOs that are unaffected by individual firm and industry characteristics. In doing so, we use a panel approach that controls for prevailing macroeconomic conditions. Our analysis supports the argument that IPOs both increase competition and make asset markets more complete. We also find that stronger firms are less vulnerable to the adverse competitive effects of IPOs than are their weaker counterparts.  

Findings

We find that listed firms stood to gain from IPO suspensions in two ways. These were (a) the implied weakening of competition from direct competitors; and (b) the reduced supply of share issues from firms with similar risk characteristics. Firms in industries that were more exposed to competition from firms waiting for IPOs at the time of the announcement had significantly greater one-day stock price returns, as did firms with similar risk characteristics. We also find that stronger firms, measured in terms of profitability and other proxies, gained less from news of the suspension. This implies that weaker firms are more vulnerable to competition from IPO candidate firms.

Abstract

Theory suggests that initial public offerings (IPOs) can adversely impact listed firms, both directly by increasing intra-industry competition, and indirectly by completing related asset market spaces. However, the endogeneity of individual IPO activity hinders testing these channels. This paper examines listing suspensions in China in a panel specification that accounts for macroeconomic and financial conditions, isolating the firm-level IPO impact. We measure the competitive impact of listing suspensions through the value share of postponed firms in the IPO queue in their industry, and asset-space competition by firms' historical covariance with a synthetic portfolio of listed firms with the IPO queue industry mix at the time of suspension. Our results support the predicted IPO effects through both channels. We also document heterogeneity in IPO effects. Stronger firms-measured through a variety of proxies-benefit less from the suspension news. These results are robust to a battery of sensitivity tests.

JEL classification: G14, G18, G32

Keywords: initial public offerings, China, competition, asset space