Government Control and the Higher Costs of Going Public: Evidence from China's New Stock Market

Abstract

IPO underpricing or the indirect cost of going public is extremely high in China. We hypothesize that government control over the corporate economy underlies this puzzle: Bureaucratic managers in state-owned firms as well as regulatory authorities have incentives to underprice. Using a sample of China's new stock market, we find evidence supporting this hypothesis. Underpricing is higher for state-owned firms and for IPOs before the reform which made IPO prices less affected by the regulator. The reform is thus beneficial to Chinese firms, since the reduction in underpricing more than offsets the increase in direct costs for compensating underwriters.

Keywords: IPO underpricing, Government control, Managerial incentive, Underwriting fee, Shenzhen SME Board

JEL Classification: G12, G24, G32, L33