The Consequences of Shifting the IPO Offer Pricing Power from Securities Regulators to Market Participants in Weak Institutional Environments: Evidence from China

55 Pages Posted: 5 Aug 2014 Last revised: 9 Oct 2016

See all articles by Jun Chen

Jun Chen

Zhejiang University

Bin Ke

National University of Singapore

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Zhifeng Yang

Stony Brook University

Date Written: September 30, 2016

Abstract

We examine the consequences of shifting the IPO offer pricing power from securities regulators to market participants in a representative weak investor protection country, China. We show IPO offer prices relative to reported earnings are less depressed when determined by market participants than by securities regulators. IPO firms are also less likely to select a low quality auditor or inflate the pre-IPO earnings when IPO offer prices are determined by market participants. However, we find no evidence that IPO offerings are more likely to be overpriced when offer prices are determined by market participants. Furthermore, IPO firms’ financial reporting choices made at the time of the IPO have a long lasting impact on the firms’ subsequent financial reporting quality. Overall, our results contribute to the ongoing debate on the appropriate roles of securities regulators versus market forces in protecting public investors in markets with weak institutional environments.

Keywords: IPO regulation; financial reporting quality; auditor choice; IPO offer pricing

JEL Classification: G38, M41, M43

Suggested Citation

Chen, Jun and Ke, Bin and Wu, Donghui and Yang, Zhifeng, The Consequences of Shifting the IPO Offer Pricing Power from Securities Regulators to Market Participants in Weak Institutional Environments: Evidence from China (September 30, 2016). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2475785 or http://dx.doi.org/10.2139/ssrn.2475785

Jun Chen

Zhejiang University ( email )

School of Management
Zijingang Campus
Hangzhou, Zhejiang 310058
China

HOME PAGE: http://person.zju.edu.cn/junchen

Bin Ke (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Donghui Wu

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

Room 1033, 10/F
Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

Zhifeng Yang

Stony Brook University ( email )

Health Science Center
Level 3, Room 043
Stony Brook, NY 11794-8322
United States

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