An empirical analysis of IPOs and SEOs : evidence from the Chinese stock markets


July 2014

Thesis or dissertation

© 2014 Tianxiang Xu. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.

Initial Public Offerings (IPOs) have drawn much attention among financial economists recently. However, gaps still exist and more empirical research is warranted, especially for immature stock markets, such as China. This research mainly concentrates on the aspects of “Credit rating effect on IPOs and SEOs’, ‘Complicated IPO allocation mechanisms’ and ‘Links between IPOs and SEOs, and SEOs motivations’ in the Chinese case using data from 1990 to 2011, which covers the entire history of the Chinese stock market development.
First of all, this thesis confirms that the presence of credit rating is able to reduce information asymmetry and lower the IPO/SEO underpricing level no matter the rating is from the Chinese domestic rating agency or top three international rating agencies (S&P, Fitch and Moody’s), where the so-called ‘Non-creditable rating’ system does work in Chinese case. Further, this thesis proves additional evidence that multiple credit ratings' presence can lower the IPO/SEO underpricing level. What is more, this research confirms that what matters on IPO/SEO underpricing is not only the presence of credit rating, but also the level of credit rating. In order to analyse the credit-rating effect, this thesis has also divided sample into four sub-samples based on a pricing model in China and provides additional results that credit-rating presence is only able to reduce information asymmetry in time periods two and three for IPO, but the presence of credit rating can lower underpricing for SEO in all time periods.
Secondly, we examine the determinants of the allocation mechanism choice and the how effective each allocation mechanism is in reducing the IPO underpricing for the Chinese market. Our results show that among the several IPO allocation mechanisms in China, the “bookbuilding” (BB) is most effective in reducing the underpricing level, and that the market conditions, firm’s risk level, information asymmetry and capital demand all play important roles in the choice of the IPO allocation mechanism. Our results also attest that firms with larger board size and or a higher proportion of legal persons sharing ownership are less likely to use the BB allocation mechanism. A higher proportion of tradable shares is negatively associated with the likelihood of using BB allocation mechanism, and the short-term and the long-term performance of IPOs vary significantly across the allocation mechanisms.
Thirdly, regarding the link between IPOs and SEOs, the results provide new evidence that firms do underpricing IPOs as strategy and will compensate the loss from following SEOs with higher price and larger sizes. Additionally, this thesis also captures the link between the IPO and SEO effect in different time lengths (doing SEOs within 12 months, 24 months, 36 months and more than 36 months after IPOs). The thesis confirms corporate governance can influence SEO decisions as well. Incentives of SEOs in the Chinese case also be evaluated in this thesis.
All our results in the thesis provide empirical evidence of difference areas about IPO and SEO in the Chinese case, and the results can be used as references directly in the real world.

Business School, The University of Hull
Guney, Yilmaz; Azevedo, Alcino
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