IPO over-funding and cost stickiness

ABSTRACT

The paper explores the influence of IPO over-funding on the cost stickiness. We first document that the liquidity from IPO over-funding has positive association with the cost stickiness in China which indicates that the liquidity supplement from IPO over-funding increases manager’s empire building incentives and reduces company’s operating efficiency. Besides, we find that this positive association is more significant in companies with weak governance in terms of less power balance, lower debt constraints and less institutional investor’s supervision. It is because company’s governance mechanism plays an important role on the efficiency of IPO proceeds. These conclusions provide enlightenment for the current regulation of listed companies.

KEYWORDS:

• IPO over-funding
• cost stickiness
• power balance
• debt constraint
• institutional investor’s supervision

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The reasons we focus on IPOs in Shenzhen Stock Exchanges are as follows. (1) All IPOs in China’s Shenzhen and Shanghai Stock Exchanges are classified as IPOs on main board, on SME board and on ChiNext board. From 2009, there is no new IPO on main board in Shenzhen Stock Exchange market. At the same time, the number of newly listed company on main board in Shanghai market is also limited. There are only 87 new IPOs from 2009 to 2013, 39 of which are in manufacturing industry. The total expected raised funds for them are 219.01 billion Yuan while the over-raised funds is 126.68 billion Yuan which indicates that the over-raised ratio is only 30%. The number of IPOs on ChiNext board and SME board are 354 and 426 respectively. On ChiNext board, 343 of IPOs experience excessive financing, accounting for 96.89% of IPOs. Compared to 86.83 billion Yuan of expected raised funds, the over-raised funds is 126.68 billion Yuan. That means the over-raised ratio on ChiNext board is 146%. Similar situation exists on SME board as well. 94.83% of IPOs on SME board have over-raised funds and the over-raised ratio is 105%. These results show higher excessive funding is an important and urgent issue on ChiNext board and SME board. (2) IPOs on main board face different regulations from those on SME board and on ChiNext board. For IPOs in Shenzhen Stock Exchange, internal auditing institution is responsible for daily management and regulation of IPO funds. It should comprehensively check the utilization of IPO funds in every quarter. For IPOs in Shanghai Stock Exchange, board of directors is in charge of the management and regulation of IPO funds and performs IPO funds check every six months. In addition, if company listed in Shanghai Stock Exchange wants to use IPO funds to provide liquidity, it needs to get approval from shareholder meeting, board of directors, independent director, board of supervisors and sponsor. However, for company listed in Shenzhen Stock Exchange, board of supervisors needs not to express its opinion.

2. China security regulation committee restarted IPO in July 2009 after nine months deep freeze. From then, companies are required to disclose the detailed information about utilization of IPO funds. IPO halted again from November 2012.

Additional information

Funding

Lu Zhang thanks the support by the National Natural Science Foundation of China (71802011), the Project for Humanities and Social Science Research of Ministry of Education of China (18YJC630244), the Beijing High-end Discipline Construction Project in Business Administration and the Beijing First-class Specialty Construction Project in Accounting. Huijuan Wang thanks the support by the National Natural Science Foundation of China (71702161), Zhejiang Provincial Natural Science Foundation of China (17G020008LQ), Zhejiang Philosophy and Social Science Planning Project (16NDJC021Z) and the Zhejiang University of Finance and Economics Research and Innovation Team.