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Research on the Long-run Performance of IPO in China’s A-share Market

Author: MaLi
Tutor: LiJianYuan
School: Dongbei University of Finance
Course: Finance
Keywords: long-run performance of IPO CAR BHAR WR
CLC: F832.51
Type: Master's thesis
Year: 2011
Downloads: 122
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Abstract

The long-term performance of IPO is currently the focus of the academic research. Hence, study on long-term performance of IPO is not onlya challenge against the theory of "effective market",but also can provide good guidence for investors to make decisions and for enterprises to choose channels of finance. At present, the majority of academic researches from both home and abroad pointed out at the long-term performance of IPO is not strong. Lee、Taylor、.Ritter、Aggarwal et al all pointed out the performance of IPO was weak to various degrees. On contrary, scholars such as Liuli、Wangmeijin、Dingsongliang argued strong long-term performance of IPO.The section of fundamental theories in this dissertation starts with the introduction of six theories concerning long-term performance of IPO and their respective representative scholars. Secondly, the history of the reform of review system of IPO was narrated. Thirdly, the overall and industry characteristics of IPOin China are described. Finally, the offering and pricing mechanisims are discussed.A Stocks from 1998-2007 offered in the Shanghai and Shenzhen markets are sampled and Shanghai A-Shares Index and Shenzhen A-Shares Index studied as the benchmark return. The study window is 3 years and long-term performance refers to performance after 3 years since IPO. The performance are quantified by using CAR,BHAR and WR.Overall, the above three indice show the trend of gradual increase and the t-statistc of CAR is significantly above 0 while the one of WR above 1.Influence factors are divided into 3 groups in this dissertation, i.e. fundamental characteritics of enterprises, investor behavior and finance indice.Regarding enterprise characteristics, IPO of five industries including finance, public utility, comprehensive, manufacturing industry and commerce. IPO issued through online pricing, offering to secondary market, full advance payment, online and offline bidding is characterized by strong performance in long term. Except 2000,2001 and 2004, IPOs made in other years are featured by strong performance. Stocks whose P/E is lower than 80 show the same trait.As for the investor behavior, only the CAR of the sample group with the return on the initial day between 1 and 1.5 while other five groups reflect strong long-term performance. Particularly, the best performance was found in the group of lowest return on the initial day. Stocks of higher Swap rate are more active in terms of performance. With respect to finance indice, despite the same strong long termperformance of stocks of different D/A, stocks of lowest D/A are typified by strongest performance which is related to the monolistic position of these enterprises. Except fluctuations of CAR exceeding 3 years of stocks of currentratio over 5, other groups all show strong performance of IPO in long term. Moreover, the group of lowest current ratio exhibit stronger performance than other groups. Stocks of cash flow per share beyond 0 all show strong performance whereas similar pattern is not found in those of cash flow per share smaller than 0. Therefore, it is necessary for investors holding stocks for long period to choose stocks with as large sash flow per share as possible. The strong performance of IPO is negatively corralated to the coprehensive leverage ratio.The Business Performance Approach incorporates four indicators i.e. current ratio, debt ratio, accounts receivable turnover rate, and ROE, into which industry average level is taken consideration. Using this method, the author also studied changes of the above four indicators in the market three years before after the IPO. The empirical study has found that current ratio reduced year by year after listing while the debt ratio, accounts receivable turnover ratio and ROE increased. THerefore, there is no strong performance of A-share IPO of China’s; instead, it revealed weak performance. This paper compares the results of the two methods, finding that the results of the Business Performance Approach are more accurate credible, because it is more in line with the Chinese institutional investors’ dispostion of speculation of new shares.Finally, the study results of the dissertation are summerized and sugestions for improving the long-term performance of IPO of Chinese enterprises are proposed, including strict review of IPO application, perfection of corporate governance, improvement of incentive mechanism and independent directors, rational attitude towards the amount and effectiveness of the solicted funds. At the same time, the last section of the dissertation includes the improvable aspects of the dissertation, pointing out the direction for future research.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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