The Unintended Consequences of Regulations in Emerging Financial Markets: Evidence from the Chinese IPO Market

ABSTRACT

This paper explores the impact of regulations imposed by Chinese authorities on the development of the Chinese IPO market. Because of limits on prices and proceeds, the Chinese IPO market does not attract companies that need cash the most. Some regulations exclude firms from the domestic IPO market. Other regulations induce firms with large growth options to list abroad. Some IPO firms that raise large amounts of cash decide to pay large dividends shortly after going public. Investors interpret this behavior as evidence that they overestimated the growth options of these firms at the time of their IPO and react accordingly.

KEY WORDS:

• IPO
• list abroad
• pay large dividends

Notes

1. The “Measures for the Administration of the Issuance of Securities by listed companies(上市公司证券发行管理办法 in Chinese)” issued by Chinese Securities Regulatory Commission in 2006 state in the first item of Article 10 that “the amount of funds raised should not exceed the amount required by the project”. Before 2009, some firms were allowed to raise more funds than needed. However, the excess ratio was very small. For example, the average excess ratio in 2006, 2007 and 2008 was −1.9%, 0.2% and 0.5%,respectively, while in 2009,2010 and 2011, it was 25.5%,33.1% and 24.4% respectively.

2. The possibility of using the number of shares sold as an adjustment variable for the size of the IPO is limited by a 1999 law that imposes a minimum number of new shares and was limited even more by a 2007 decision that fixed the number of shares sold in the IPO (see Appendix B for a detailed presentation of this and other rules).

3. In share swaps, the firms do not go through the standard IPO process. Instead, as in a reverse merger, the shareholders of another listed firm swap their shares with those of the IPO firm.

4. For example, Shangdong Jintai’s IPO was approved in 1989, but the company was not listed until 2001. We cannot obtain the prospectuses of these companies.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71572167, 71772081, 71862015].