Challenges to China's new stock market for small and medium-size enterprises: trading price falls below the IPO price

Abstract

This study discusses the development of the Growth Enterprise Board (GEB), a part of the Shenzhen Stock Exchange (SZSE), which allows small and medium-size enterprises (SMEs) to raise capital on favourable terms by issuing shares in China. We use all initial public offerings (IPOs) in the GEB market to model the probability of the trading price for new issues that will fall below their IPO price from October 2009 to December 31, 2011. Three probability models (logit, probit and scobit models) are used. The results show that four important factors explain the probability of trading price falling below their IPO price. A high first-day turnover ratio, a small price update, an optimistic stock market, and high average initial returns of other firms prior to an IPO issue all reduce the risk that the trading price will fall below the IPO price. The stock market returns have a non-linear significant effect on that probability. Our results are useful for regulators, underwriters, and issuers in the development of the GEB market.

Keywords:

• growth enterprise board
• IPO
• Chinese stock market
• probability model

JEL Classification:

• C51
• G24
• G28

Additional information

Notes on contributors

Haifeng Guo

Haifeng GUO is an Associate Professor at the Department of Applied Economics, School of management, Harbin Institute of Technology, China. She got her PhD degree in Economics in Monash University, Australia. Her research area includes initial public offerings and monetary policy, etc.

Tienan Wang

Tienan WANG is a Professor at the Department of Business Administration, School of Management, Harbin Institute of Technology, China. His research area is managerial economics, which include investing strategy, stock market and supply chain management.

Yijun Li

Yijun LI is a Professor at the Department of Management Science and Engineering, School of Management, Harbin Institute of Technology, China. He is also the Deputy Head of the Management Division in National Natural Science Foundation of China. His research area includes information system, economics in management, etc.

Hung-Gay Fung

Hunggay FUNG is a Professor in College of Business Administration, University of Missouri–St. Louis, USA. His research area includes stock market, Chinese economy and monetary policies, etc.