Research note: An investigation of the relation between pre-IPO dividends and vendor sales

In contrast to post-listing dividend initiations, the corporate finance literature offers limited coverage of pre-IPO dividends. The present inquiry assesses IPOs in Hong Kong where both pre-listing dividend distributions and IPO vendor sales occur with regularity. As a means of distributing cash to controllers, pre-IPO dividends potentially offer an exit route for insiders without the need for a conspicuous vendor sale at IPO. This study extends the limited evidence on the “Pre-IPO Dividend puzzle” (Martin and Zeckhauser 2010) and the information signaling role of prelisting cash distributions (Wang et al. 2023) in two important ways. First, unlike the mainland PRC, where regulatory proscriptions discourage secondary offers, vendor sales occur often in Hong Kong. Second, in contrast to the US, mainland PRC, and most other jurisdictions, Hong Kong’s tax environment neither encourages nor discourages dividends relative to capital gains. For individual investors, the Hong Kong SAR Government imposes a zero rate of tax on both stock income and capital gains. Most issuers in the Hong Kong market during the study period demonstrated a significant record of pre-IPO profits. Accordingly, the incidence of cash payouts is at a high rate relative to rates evident in other major IPO locales. Hong Kong therefore provides a novel setting for investigation of pre-IPO dividend behavior. Present study findings suggest that pre-IPO cash distributions do not substitute for IPO vendor sales. Post-listing cash distributions also exhibit little to no association with vendor sales. However, ex-ante uncertainty, as proxied by offer price range, bears positive correlation with the frequency of post-listing dividend omissions. Finally, issuers distributing cash pre-IPO demonstrate greater frequency of pay-outs post-IPO.