Equity Financing and Exports: Evidence from IPO Approvals in China

Abstract

Finance theory highlights fundamental differences between equity and bank financing in supporting firm growth, yet their differential impacts on international trade remain understudied. This study provides the first empirical study on how access to equity financing affects a firm's export activities. We leverage the unique institutional context in China, where a stringent approval-based IPO system ensures that only sufficiently qualified firms advance to the final stage of the review process: the IPO review meetings. Our empirical strategy compares the export performance of successful IPO applicants with those "near misses"-applicants rejected at the IPO review meeting. To sharpen identification, we utilize review meeting records to exclude rejection cases citing concerns about revenue growth or profitability risks, as these may entail unobserved factors that also influence a firm's future export performance. Our difference-indifferences analysis reveals that IPO approval leads to a significant annualized increase of more than 6% in firms'export value over the subsequent six years. Unlike previous findings on debt financing, equity financing primarily affects the extensive margin, enabling firms to expand into more destination-product markets. We provide novel evidence for multiple economic mechanisms through which equity financing enhances exports: facilitating intangible capital accumulation, reducing informational frictions, and fostering risky foreign market exploration activities.

Keywords: Firm Exports, IPOs, Equity Financing, Chinese Economy

JEL Classification: F10, G10