Ipo Location, Pre Ipo Performance, Post Ipo Performance

There has been a significant growth in the number of Chinese companies going public in recent years. Some of them listed their shares locally in Shanghai and Shenzhen, while others chose a stock exchange with better access to international capital (e.g. Hong Kong). The existing literature argues that initial public offerings (IPO) locations might affect their subsequent performance. For example, Wei and Wong (2009) showed that Chinese real estate firms listed on the Hong Kong stock market exhibited better post-IPO performance than those listed on the mainland China stock market. This paper extends the analysis to the underlying sources for these firms' IPO location choice. One possible source is associated with self-selection: if the Hong Kong stock market has stricter listing requirements, then firms with better pre-IPO performance would self-select to issue shares in Hong Kong and are likely to continue with better post-IPO performance. Another possible source comes from the agency theory: if the Hong Kong stock market has a better legal infrastructure to mitigate agency problems, then firms listed in Hong Kong would have a larger performance increase (measured by the difference between post and pre-IPO profitability) than those listed in mainland China. First of all, we showed that, in the mainland stock market, the divergence between firms' real profitability and their predicted profitability during IPOs is larger than in the Hong Kong market. That is, in mainland stock market, firms tend to have more over-estimation about their post-IPO performance. Secondly, firms which conduct IPOs in Hong Kong had better pre-IPO profitability than those listed in mainland. The above results support the theory that the mainland market provides less rigorous requirement for IPOs, so that firms with low performance self-select to do IPO in mainland. Thirdly, after controlling firms' pre-IPO performance and other factors such ownership structure, size, and timing effects, firms listed in Hong Kong still exhibits better post-IPO profitability than those listed in mainland China. Thus, the Hong Kong stock market provides better corporate governance after IPOs. Overall, our analysis highlights that both pre-IPO self-selection and post-IPO corporate governance affect firms' IPO location choices. The approach would also allow us to identify the relative importance of the two sources and provide policy implications on whether a stock market should put more resources in promoting post-IPO monitoring or in screening firms more strictly during IPOs.