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The role of ‘cornerstone’ investors and the Chinese state in the relative underpricing of state- and privately controlled IPO firms

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  • Paul B. McGuinness

Abstract

In recent years, China has partially privatized some of its most important state-owned enterprise companies. Hong Kong has been host to the largest of these issues and during the five-year period, 2005--2009, more initial public offering (IPO) funds were generated through this market than any other. A key development in this market has been the emergence of ‘cornerstone’ investor agreements, which earmark stock allocations to privileged investor parties in the immediate run-up to prospectus release. This study offers a number of important contributions. First, after assessing the characteristics of such agreements, multivariate results point to some evidence of a positive association between the presence of such agreements and initial IPO returns. Second, the Perotti (1995) model contention of increased initial returns in state-controlled entities fails to garner support. Third, as an extension of work on the ‘political connections’ of Chinese A-share issuers (Fan et al ., 2007; Francis et al . 2009), the political importance of issuers in the Hong Kong market-place is assessed. This study finds little evidence to support the notion that China's most politically important (strategic) issuers face lower underpricing levels than other issuers. Fourth, IPOs pitched between the incipient phase of the Global Credit Crunch (November 2007) and the Lehman Brothers’ Collapse (September 2008) generated significantly weaker initial returns than issues in other periods. Fifth, IPO clustering, underpricing rates on concurrently positioned offerings and an issuer's price-to-earnings ratio also function to explain initial returns. This last area supports the contention that offer prices fail to fully impound publicly available information (Bradley and Jordan, 2002; Loughran and Ritter, 2002).

Suggested Citation

  • Paul B. McGuinness, 2012. "The role of ‘cornerstone’ investors and the Chinese state in the relative underpricing of state- and privately controlled IPO firms," Applied Financial Economics, Taylor & Francis Journals, vol. 22(18), pages 1529-1551, September.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:18:p:1529-1551
    DOI: 10.1080/09603107.2012.665595
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    References listed on IDEAS

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    1. Perotti, Enrico C, 1995. "Credible Privatization," American Economic Review, American Economic Association, vol. 85(4), pages 847-859, September.
    2. Vong, Anna P.I. & Trigueiros, Duarte, 2010. "The short-run price performance of initial public offerings in Hong Kong: New evidence," Global Finance Journal, Elsevier, vol. 21(3), pages 253-261.
    3. Xiaonian Xu & Yan Wang, 1997. "Ownership structure, corporate governance, and corporate performance : the case of Chinese stock companies," Policy Research Working Paper Series 1794, The World Bank.
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    Cited by:

    1. Espenlaub, Susanne & Khurshed, Arif & Mohamed, Abdulkadir & Saadouni, Brahim, 2016. "Committed anchor investment and IPO survival – The roles of cornerstone and strategic investors," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 139-155.
    2. Paul B. McGuinness, 2018. "IPO Firm Performance and Its Link with Board Officer Gender, Family-Ties and Other Demographics," Journal of Business Ethics, Springer, vol. 152(2), pages 499-521, October.
    3. Edgardo Cayón, 2014. "The Effects of Contagion During the Global Financial Crisis in Government-Regulated and Sponsored Assets in Emerging Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 30, July-Dece.
    4. McGuinness, Paul B., 2014. "IPO firm value and its connection with cornerstone and wider signalling effects," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 138-162.
    5. Charlie X. Cai & Paul B. McGuinness & Qi Zhang, 2018. "Credit scores and the performance of newly-listed stocks: an exploration of the Chinese A-share market," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 79-111, July.
    6. McGuinness, Paul B., 2016. "Voluntary profit forecast disclosures, IPO pricing revisions and after-market earnings drift," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 70-83.
    7. Paul B. McGuinness, 2016. "Post-IPO performance and its association with subscription cascades and issuers’ strategic-political importance," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 291-333, February.
    8. Edgardo Cayón, 2014. "The Effects of Contagion During the Global Financial Crisis in Government-Regulated and Sponsored Assets in Emerging Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2014, January-A.
    9. Paul B. McGuinness, 2019. "The Role of Governance and Bank Funding in the Determination of Cornerstone Allocations in Chinese Equity Offers," JRFM, MDPI, vol. 12(3), pages 1-20, July.
    10. Arnab Bhattacharya & Binay Bhushan Chakrabarti & Chinmoy Ghosh & Milena Petrova, 2020. "Innovations in financing: The impact of anchor investors in Indian IPOs," European Financial Management, European Financial Management Association, vol. 26(4), pages 1059-1106, September.

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