An Inquiry into Chinese Initial Public Offerings from a Corporate Governance Perspective
Atinc, Guclu, Liu, Yan, Kroll, Mark, Waiters, Bruce A., Journal of Business Strategies
Using longitudinal data, this study investigates the impact of managerial ownership, director ownership, state ownership, firm size, and blockholders on initial public offerings (IPOs) of Chinese listed companies from 1991 to 2007. Underpricing of IPOs is examined at three specifically identified time periods which we call the primitive stage, the development stage, and the maturity stage. Our results indicate that those corporate governance factors we examined in this study exhibit different characteristics at different stages for Chinese publicly listed companies which signify a need to assess the impact of governance mechanisms on IPO processes of emerging economies from a different perspective.
This study examines the initial public offerings of Chinese publicly traded companies and illuminates some of the unknowns of this dynamic economy. The process of China's market economy reform has been experimental and gradual. Since the reform started in 1978, there has been remarkable growth in the Chinese economy. Since the two Chinese stock markets were formed in the early 1990s, hundreds of companies have been privatized and have gone public (Sun, Li, & Zou, 2005). Although the idea was to create a free market economy in which business practices reflect those of western counterparts, scholars call for more in-depth studies about the uniqueness of the Chinese quasi-free-market structure (Firth, Fung, & Rui, 2006; 2007).
Popular research areas such as corporate governance of listed firms (Chert, 2001) and State-Owned-Enterprises (Hua, Miesing, & Li, 2006) have been investigated, while initial public offerings (IPOs) and related issues have only recently received attention (Deng & Dorfleitner, 2008; Kao, Wu, & Yang, 2009). Sanders and Boivie (2004) proposed that in emerging industries, there are qualitative factors rather than objective factors that serve as signals for the valuation of firms. The authors argue that "in highly uncertain environments investors attempt to reduce their uncertainty through screening firms and sorting their valuations based on new firms' use of observable agency control mechanisms" (Sanders & Boivie, 2004:170). Going beyond that, this study considers some of these observable mechanisms and makes a connection between them and IPO firm performance in China. There is evidence characterizing the Chinese IPO market as one in which there is a prevalence of uncertainty and information asymmetry (Ma, 2007). As China is considered a rising star in the 21st century, assessing the progress of the IPO process in China is important. Particularly, this study assumes that different governance mechanisms may have different impacts on firm valuation at different points in time in the evolution of the Chinese new issue market.
Although the study is retrospective, the results may provide insights into the future of the Chinese IPO market and IPO markets in other emerging economies. This study examines the impact of managerial ownership (Kroll, Waiters, & Le, 2007), director ownership (Kroll, Walters, & Wright, 2008), firm size (Dalton, Daily, Johnson, & Ellstrand, 1999), state ownership (Sun et al., 2005), and blockholders (Daily, Dalton, & Rajagopalan, 2003) on IPO underpricing (Arthurs, Hoskisson, Busenitz, & Johnson, 2008) at three specific points in time. A review of the literatural indicates that an explanation of the temporal changes in the relationships between firm governance and IPO performance has not been done. This study provides a road map for academicians in analyzing the impact of governance issues on IPOs in emerging economies and provide fresh insights into the impacts of various corporate governance devices in emerging economies that are likely to differ from earlier findings related to mature western markets.
Classical agency theory proposes that executives act as agents of the shareholders or principals (Jensen & Meckling, 1976). …