The Impact of Governmental Intervention on the Association Between Initial Public Offering and Future Stock Issuance
| Published date | 01 October 2020 |
| Date | 01 October 2020 |
| Author | Dimitrios Gounopoulos,Jingsi Leng,Yilmaz Guney,Victoria Patsika |
| DOI | http://doi.org/10.1111/1467-8551.12400 |
British Journal of Management, Vol. 31, 665–687 (2020)
DOI: 10.1111/1467-8551.12400
The Impact of Governmental Intervention
on the Association Between Initial Public
Oering and Future Stock Issuance
Dimitrios Gounopoulos , Yilmaz Guney ,1Jingsi Leng2
and Victoria Patsika3,4
School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK, 1Business School, University
of Hull, Cottingham Road, Hull HU6 7RX, UK, 2Leicester Castle Business School, De MontfortUniversity,
The Gateway, Leicester LE1 9BH, UK, 3Cardi Business School, Universityof Cardi, Park Place, Cardi
CF10 3AT, UK, and 4Southampton Business School, University ofSouthampton, Southampton SO17 1BJ, UK
Corresponding author email: d.gounopoulos@bath.ac.uk
We examine the eect of initial public oering (IPO) characteristicson seasoned equity
oering (SEO) decisions in relation to governmental intervention in China. Our results
confirm the process of underpriced IPOs in promoting earlier and larger SEOs in the Chi-
nese context. The study examines threechannels through which the Chinese government
intervenes in equity issuance activities, namely state ownership, politically connected ex-
ecutives and economic developmentareas. We find that the connection between IPOs and
SEOs becomes less apparent in government-intervenedfirms. We attribute these results to
the conflict between the state and minority shareholders, which leads to high uncertainty
and risk in government-intervened firms.
Introduction
Welch (1989) statesthat firms with good prospects
underprice initial public oerings (IPOs) to inform
outsiders of their high quality and compensate the
We are grateful to Walid Busaba, Trevis Certo, Selim
Chahine, Kalok Chan, Sandeep Dahiya, Tim Jenkin-
son, Carole Gresse, Arif Khurshed, LeoraKlapper, Gary
Koop, Daisy Li, David Newton, Paul McGuinness, Jay
Ritter, Ian Tonks, Liu Xiaoding, seminar participants at
the University of Bath,the University of Birmingham, the
University of Hull, Newcastle University and the Uni-
versity of Sussex. Comments from participants at the
British Academy of Management, European Finance As-
sociation Meetings, Financial Engineering and Banking
Society, Financial Management Conference are also ac-
knowledged. We are grateful to Jean Chen from Xian
Jiatong-Liverpool University, Gary Zhou from Ernst &
Young (ShenZhen) and Wu Qinq from Shanghai Stock
Exchange for insightful discussions about Chinese laws
and to Chen Huang, Hang Pham and George Loukopou-
los for excellent research assistance.
losses via an earlier and larger seasoned equity
oering (SEO) (see also Jegadeesh, Weinstein and
Welch, 1993). However, the financial environment
influences boundedly investors in interpreting
information indicated by issuers (Park and Patel,
2015). Bayar, Chemmanur and Fulghieri (2019), in
a study examining the optimal disclosure around
IPOs and SEOs, document that equity oering
prices are aected by various rules governing
disclosure around equity issues.1The Chinese
capital market is criticized for severe asymmetric
information, agency conflicts and opaque dis-
closure (Bruton et al., 2015; McGuinness, 2018).
More importantly, governmental interferences are
still prevalent in China, as they play key roles in
shaping equity issuing activities (Huang, Uchida
and Zha, 2016). These issues constitute additional
1They are aected also by demand from institutional in-
vestors with access to a costly disclosure verificationtech-
nology; and demand from retail investors.
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666 D. Gounopoulos et al.
impediments that lead firms to deviate from their
optimal financing strategy and determine the ease
and eciency with which firms can access the
capital markets (Bo,Huang and Wang, 2011). Pre-
vious studies advanced our understanding of the
connection between IPO and SEO performances
(Francis et al., 2010; Ghosh, Nag and Sirmans,
2000; Slovin, Sushka and Bendeck, 1994), but
their findings may not necessarily apply to the
Chinese financial environment, which is unique –
and hence worthy of investigation – due to high
governmental intervention in financial markets. In
particular, whether and how state interference in-
fluences firms’ equity issuance strategy collectively
has not been fully addressed.
While governmental interference is not unique
in the Chinese capital market, the role it plays in
China is of particular interest (Behr, Kisgen and
Taillard, 2018; Bruno, Cornaggia and Cornaggia,
2016; Farin´
os, Garc´
ıa and Ib´
a˜
nez, 2007). Firstly,
the Chinese government is more directly involved
in the business sector through its state-owned en-
terprises (SOEs), compared with its counterparties
in other countries (Zheng, Ni and Crilly, 2019).
Although the Chinese government has reduced its
control over the corporate sector through the es-
tablishment of two domestic stock exchanges and
has encouraged the growth of private enterprises,
SOEs still make a substantial contribution to the
economic activity (Li, Li and Wang,2019). The ex-
istence of significant state ownership in listed firms
makes it possible for the government to influence
corporate policies that favour the state sector.Sec-
ondly, the Chinese government remains dominant
in listed firms by influencing the appointment of
top executives (Chen et al., 2011). Many firms
in China have chief executive ocers (CEOs) or
chairpersons with political connections, who are
either incumbents or previously held positions as
government ocers. These decision-makers tend
to take advantage of their positions to aid the
government’s objectives in return for a political
promotion (Cao et al., 2019). Thirdly, the most
important financing channel in China is still the
banking system, which is dominated by the four
largest state-owned banks (Allen, Qian and Qian,
2005; Firth, Li and Wang, 2016). Although the
development of equity and bond markets in China
provides firms with an alternative channel of
financing, the largest state-owned banks supply
more than 80% of commercial and industrial loans
to corporations (Shao, Hern´
andez and Liu, 2015).
The Chinese government maintains influence over
enterprises and directs their growth path through
its control on the financial providers. Finally,
governmental institutions, including the State-
owned Assets Supervision and Administration
Commission of the State Council (SASAC), take
responsibility to monitor the behaviour of SOEs
(Guo, Huy and Xiao, 2017). By doing so, SOEs
are encouraged to utilize their ongoing activities
to serve the public and promote social harmony.
Motivated by governmental intervention in the
Chinese market, which tends to influence corpo-
rate policies including equity issuance, this study
aims to explore how state interference aects the
interaction between IPOs and SEOs in China. We
hypothesize that IPO underpricing is less likely to
serve as an indicator of good prospects in firms
with state involvement, and therefore to connect
with an earlier or larger SEO.Firstly, Chinese gov-
ernment intervention forces firms to accomplish
social and political goals, including fulfilling a job
to society,maintaining social stability and regional
development (Chen et al., 2011). The conflict be-
tween state and minority shareholders leads to in-
vestment ineciency, and therefore destroys cor-
porate value. IPO underpricing in firms with state
involvement can be compensation for expected in-
eciencies instead of a device to reveal the good
quality of firms. Moreover, state-owned firms un-
derprice their stocks through SEOs for political
and economic ends rather than to raise capital in
the future (Jones et al., 1999). The Chinese govern-
ment targets privatizing SOEs, and therefore un-
derprices IPOs to show commitment to privatiza-
tion. As an example, Huolinhe Opencut Coal Ind
as an SOE achieved an SEO in 2014 which is 10
times its IPO, with the oering underpriced by ap-
proximately168%, whereas Luxshare Precision In-
dustry Co Ltd, a non-SOE, achieved an SEO with
similar size around the same time and only un-
derpriced its IPO by 39%. By discounting the of-
fer price, the Chinese government intends to pro-
mote broader share ownership (Chen et al., 2015).
Finally, having strong support from governmental
institutions, access to bank debt is relatively easy
for firms with state involvement (Sapienza, 2004),
which mitigates their incentive to entice investors
to raise capital from the following equity issues.
We consider three forms of governmental
intervention in this study. The first form is state
ownership of corporationsin China. Existing stud-
ies suggest that a high level of state ownership is
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