Pyramid IPOs on the Chinese Growth Enterprise Market

35 Pages Posted: 8 Feb 2013 Last revised: 11 Jun 2013

See all articles by Martin Holmen

Martin Holmen

University of Gothenburg - Department of Economics; University of Gothenburg - Centre for Finance

Peng Wang

Hanken School of Economics

Date Written: June 2013

Abstract

This paper investigates Initial Public Offerings (IPOs) of high-tech firms on the Chinese Growth Enterprise Market (GEM). Almost half of the high tech IPOs on the GEM are set up in pyramid structures. The likelihood of a pyramid structure increases with the size of the IPO firm and state control. Our results do not suggest that pyramids are set up to overcome financial constraints. However, we document that pyramid IPOs are discounted before the IPO. The price to book ratio estimated at the subscription price is significantly lower for pyramid IPOs compared to stand-alone IPOs. Furthermore, the underpricing is higher for pyramid IPOs. We conclude that IPO investors demand a higher risk-premium when investing in pyramid IPOs which translates into a lower subscription price and higher underpricing.

Keywords: pyramid ownership structure, Initial Public Offering, Growth Enterprise Market, Underpricing, Oversubscription

JEL Classification: G32

Suggested Citation

Holmen, Martin and Wang, Peng, Pyramid IPOs on the Chinese Growth Enterprise Market (June 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2213474 or http://dx.doi.org/10.2139/ssrn.2213474

Martin Holmen

University of Gothenburg - Department of Economics ( email )

School of Business, Economics and Law
Box 640
Gothenburg, 40530
Sweden
+46 31 786 6442 (Phone)
+46 31 7865114 (Fax)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Peng Wang (Contact Author)

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00640
Finland

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