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Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets

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  • Charles M C Lee
  • Yuanyu Qu
  • Tao Shen

Abstract

From 2007 to 2020, unlisted Chinese firms paid an average of over US $500 million to listed firms for their shell value in reverse merger transactions. We show that this large shadow price for a public listing sheds light on other features of Chinese markets, including (i) near-zero mortality rates, (ii) frequent major-asset restructurings (MARs), (iii) insensitivity of small-firm prices to corporate earnings, and (iv) a large size effect. A firm-level measure of expected shell probability (ESP) predicts stock returns, MARs, earnings-to-price sensitivity, and short-window returns to initial public offering-related regulatory news. Furthermore, adding ESP to existing pricing models for Chinese stocks significantly improves model performance.

Suggested Citation

  • Charles M C Lee & Yuanyu Qu & Tao Shen, 2023. "Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets," Review of Finance, European Finance Association, vol. 27(3), pages 809-849.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:3:p:809-849.
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    More about this item

    Keywords

    Reverse mergers; Shell values; IPOs; Return predictability; Chinese equity markets;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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