Last Minute Deals: Rent Seeking in IPO Market

44 Pages Posted: 23 Apr 2015 Last revised: 9 Oct 2015

See all articles by Yuan Ding

Yuan Ding

China Europe International Business School (CEIBS)

Frank Yu

China Europe International Business School

Zhang Hua

China Europe International Business School (CEIBS)

Date Written: October 9, 2015

Abstract

This paper explores rent-seeking behavior in a heavily regulated equity-financing market. Using manually-collected information about ownership changes from China’s IPO application filings for the Growth Enterprise Market (GEM), we find that over a third of firms receive late-stage private equity investment and subsequently halve rejection rates for IPO applications, compared to firms without PE investment. The PE investors help firms pass the regulatory barriers, especially for those with weaker quality, and are rewarded with 9.5 times return over a 14-month period for an average deal. We also examine alternative explanations for extraordinary PE returns, such as financing, selection/certification, and managerial involvement, and find rent-seeking is the most coherent explanation to our findings.

Keywords: Rent seeking, Private equity, Initial public offering

JEL Classification: G3, K4

Suggested Citation

Ding, Yuan and Yu, Fang and Hua, Zhang, Last Minute Deals: Rent Seeking in IPO Market (October 9, 2015). Available at SSRN: https://ssrn.com/abstract=2597452 or http://dx.doi.org/10.2139/ssrn.2597452

Yuan Ding (Contact Author)

China Europe International Business School (CEIBS) ( email )

699, Hongfeng Road
Shanghai 201206, Shanghai 201206
China

Fang Yu

China Europe International Business School ( email )

669 Hongfeng Road
Pudong
Shanghai, 201206
China

Zhang Hua

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

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