We examine a unique phenomenon among exchange traded funds (ETFs) in the Chinese stock market, finding that ETFs pervasively participate in initial public offerings (IPOs) to profit from underpricing. The ETF IPO participation passes primary market benefits to retail investors, providing benefits from hard-to-reach investment opportunities. These active moves showing ETFs are not entirely passive highlight the gains of the active management. However, we observe that this activity leads to increased non-fundamental volatility and short-term return reversals, as well as decreased investment-q sensitivity among ETF member stocks, presenting a negative externality. Using a policy shock as the quasi-natural experiment, we establish the causality of these effects, underscoring the dual nature of ETFs active management.

We study the role of Chinese government guidance funds (GGFs) in value creation for investee firms. Using a sample of 2,855 firms that went public during the period of 2010-2021, we show that GGF-backed IPO firms had higher initial returns than non-VC-backed IPO firms and nonGGF VC-backed IPO firms. After decomposing the initial return into IPO underpricing and market overvaluation, we find that GGF-backed firms enjoyed higher overvaluation and lower underpricing than other firms. Consistent with investor sentiment and information asymmetry hypothesis, our results indicate that public investors value the benefits of political resources more than the costs of government interference associated with GGF sponsoring. However, GGF-backed firms did not outperform other-VC-backed firms when post-IPO long-term stock, operating and innovation performance is assessed. The divergence in the effects of GGFs observed in the financial and product markets reveals the complexity in evaluating the role of GGFs in value creation.

More than one in five listed firms in China initiate dividend payments during the year right before their initial public offerings (IPOs). This tendency, which seems to contradict the purpose of raising capital, constitutes the pre-IPO dividend puzzle. This paper examines this puzzle using manually collected Chinese data from 2006 to 2019. We find that firms initiating pre-IPO dividends tend to have lower IPO underpricing than non-initiating firms. We also find that the effect of pre-IPO dividend initiation on IPO underpricing is more pronounced for firms with stronger pre-IPO growth and profitability. Additional analyses indicate that initiating firms have better pre- and post-IPO operating performance and post-IPO stock performance. Moreover, initiating firms pay more dividends and have significantly higher investor attention after the IPOs. Collectively, the pre-IPO dividend initiation is not a short-term strategic behavior of low-quality firms but is intended to send positive signals and improve investors’ stock valuation.

We study the effect of mutual fund allocation on China’s IPO market under the new registration system. The introduction of mutual fund bids significantly increases IPO offer price, resulting in a low initial short-term return and suppressed IPO underpricing. Those newly listed stocks witness lower volatility in the following weeks due to preferential allocation to the mutual fund at the primary market. Further analysis suggests that large investors tend to buy during the first week after IPO and their net purchase strengthens IPO after-market volatility. This new evidence suggests that mutual fund allocation plays a critical role in IPO price discovery and decreases investor lottery trading.

We empirically examine the role of venture capital in VC-backed listed firms in Mainland China using the data of SME Board of ShenZhen Stock Exchange from June 2004 to June 2007. Contrary to the evidence from the US, we find that the VC-backed firms in Mainland China experience higher underpricing, which is not owing to the lower pricing in the primary market but the investors in the second market are too optimistic about the prospect of the VC-backed firms. In addition, the pre- and post-IPO operating performance of VC-backed firms is significantly better than that of nonVC-backed ones. Our finding supports the monitoring hypothesis that the VC-backed firms perform better than nonVC-backed firms before and after IPO for the monitoring of VC funds. Moreover, it is found that high-reputation VC-backed firms have a better post-IPO operating and market performance compared to low-reputation VC-backed ones, which is consistent with the grandstanding hypothesis proposed by Gompers (1996). However, there is no evidence to support the certification hypothesis proposed by Megginson and Weiss (1990) that VC-backed firms have a lower underpricing in the IPO performance.

The paper estimates the primary market pricing efficiency of China’s IPO after the IPO reform in June 2009, based on the stochastic frontier analysis. The results show that IPO pricing is not fully effective, and discover the existence of “deliberate underpricing”. The average pricing efficiency of China's IPO has reached 0.85, which is close to the level of the mature capital market; To certain extent, we can say that the reform of China's IPO has achieved the initial success. We also found that earnings per share and price earnings ratio are the greatest influencing factors. And there is no underwriter reputation in China. For different markets, we disclosed that, IPO pricing efficiency values in Growth Enterprise Market and Small and Medium Enterprise Board are substantially higher than the Main Board market. The paper analyzes the causes, and then gives some suggestions for the reform of China's IPO.

We empirically examine the role of venture capital in VC-backed listed firms in Mainland China. It is found that the VC-backed firms experience higher underpricing as the investors in the second market are too optimistic about the prospect of the VC-backed firms, but not about the lower pricing in the primary market. In addition, the pre- and post-IPO operating performance of VC-backed firms are found to be significantly better than that of non VC-backed ones. The result supports the monitoring model. Meanwhile, there is no evidence to support the certification model. Furthermore, it is consistent with the grandstanding model proposed by Gompers that high-reputation VC-backed firms have a better post-IPO operating and market performance compared to low-reputation VC-backed ones.

This paper examines the role of earnings management in the underpricing and long-term performance of Chinese initial public offerings (IPOs) issued during the 1998-2003 period. It tests the earnings extrapolation hypothesis that naive investors extrapolate pre-issue earnings without fully adjusting for potential manipulation of accounting accruals, thereby inflating the initial trading price. If the hypothesis holds, underpricing will be positively related to initial earnings management. However, since the latter is subsequently corrected over time, it will lead to inferior long-term stock performance. The empirical evidence is consistent with both the earnings extrapolation and the long run underperformance hypotheses for our sample of 506 IPOs.

首次公开发行抑价(IPO Underpricing）是全球各新股发行市场上普遍存在的一种现象，是一直困扰金融学界的难题之一。在我国新股发行市场上，这种现象表现的更加突出。本文在借鉴国内外已有文献的基础上，利用2004年以后中国A股市场的上市公司数据和相应的研究方法建立GARCH模型，说明上市公司IPO抑价现象中存在“多期滞后效应”，即前期上市公司IPO抑价水平对当期上市公司抑价水平有显著影响。通过分析实证结论，在完善发行机制，提高投资者阅读信息能力等方面提出政策建议。

The Chinese stock market has grown very rapidly, but is often distorted by government regulation, and this is especially true for the initial public offering market. The average underpricing of Chinese IPOs is 247 percent, the highest of any major world market. We model this extreme underpricing with a demand-supply analytical framework that captures critical institutional features of China’s primary market, and then empirically test this model using a sample of 1,397 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1991 and 2004. The pricing of IPO shares is subject to a cap set by the government, and the supply of IPO shares allowed on the market is also set by the government through the Chinese quota system. The government regulator even controls the timing of flotation of shares onto the stock exchange--after the initial public offering is executed--and there is usually a long time lag between the IPO and the actual listing of shares for trading. A special feature of the Chinese IPO market is that the government is by far the largest issuer. In our sample, 66 percent of the IPOs in our sample are pure share issue privatizations (SIPs), in which the government sells part of its ownership in state-owned enterprises (SOEs) to the public; fully 88 percent would be considered privatizations under a more expansive definition that included state-connected owners. Insider theft of corporate assets is also a big concern of IPO subscribers in China, and IPO shares must also be discounted for significant tunneling risks. We find that insider shareholdings are a negative determinant of initial returns. We suggest that investment risks in China's primary markets are greater than in other new issues markets, and these risks partly explains the extreme levels of Chinese IPO underpricing. However, the principal cause of the this underpricing is government regulation. The supply restricting measures traditionally adopted by the Chinese regulatory authorities turn IPO shares into hot commodities, which are fiercely bid for, and this leads to corruption and a reallocation of wealth from firms and investors to politically connected individuals and groups.