What can explain the direct costs of going public in China?

Posted: 20 Jan 2021 Last revised: 9 Sep 2021

See all articles by Siyuan Yan

Siyuan Yan

Hong Kong Polytechnic University - School of Accounting and Finance

Xiaoxu Ling

Hong Kong Polytechnic University - School of Accounting and Finance

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: September 9, 2021

Abstract

After the systematic reform in the IPO market from 2005, underwriting spreads in China keep increasing and become even higher than that in the US market during the past decade. Besides, unlike “the seven percent solution” in the US, spreads in China demonstrate a significant cross-sectional variation. Using the sample of IPOs from 2005 to 2015, we examine the determinants and economic meaning of underwriting spreads in China. We find significant firm, issuance, and policy characteristics that explain the variation of underwriting spreads. Next, we extract abnormal components of spreads to further explore their valuation effects. We document that abnormal spreads can reflect promotional efforts performed by underwriters. Specifically, they are positively associated with institutional investor participation and offer price revision in the IPO process. Moreover, we show that promotional efforts lead to reductions in IPO underpricing. Overall, issuing companies benefit from the deregulation of underwriting services in the way that greater promotional efforts lead to less underpricing and more capital raised by IPO firms. However, government interventions and policy uncertainty can result in increased IPO listing costs in China.

Keywords: Underwriting spreads; IPO underpricing; Policy uncertainty; Listing costs

JEL Classification: K2; G24; G34

Suggested Citation

Yan, Siyuan and Ling, Xiaoxu and Cheng, Louis T. W. and Hu, Gang, What can explain the direct costs of going public in China? (September 9, 2021). Available at SSRN: https://ssrn.com/abstract=3748563 or http://dx.doi.org/10.2139/ssrn.3748563

Siyuan Yan (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Xiaoxu Ling

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance ( email )

Hang Shin Link
Siu Lek Yuen
Shatin
United States

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

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