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The impact of innovation on IPO short-term performance – Evidence from the Chinese markets

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  • Zhou, Lu (Jolly)
  • Sadeghi, Mehdi

Abstract

Based on the regulation of the Chinese stock market, the current study explores the relationship between pre-IPO innovations with the IPO short-term performance (IPO underpricing and honeymoon period). We investigate R&D spending, characterized by information asymmetry and valuation uncertainty, which can aggravate IPO underpricing. Conversely, we found a positive signal effect for patents which may significantly reduce the extent of IPO underpricing. Therefore, public disclosure of information pertaining to innovation can help issuers to reduce their IPO costs. In conclusion, more R&D spending by IPO firms results in greater IPO underpricing, while a higher number of patents reduces the extent of IPO underpricing. Additionally, we provide extensive analysis of the industrial policy in China under which, the absolute effect of innovation input and innovation outcome on IPO underpricing were greater prior to 2014. However, considering the macroeconomic environment, the industrial policy plays an entirely different role in the Chinese capital market for IPO since 2014. Therefore, we recommend that the government makes use of industrial policy as the “visible hand” to guide the development of industry and further improves the macroeconomic environment for IPO firms.

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  • Zhou, Lu (Jolly) & Sadeghi, Mehdi, 2019. "The impact of innovation on IPO short-term performance – Evidence from the Chinese markets," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 208-235.
    • Handle: RePEc:eee:pacfin:v:53:y:2019:i:c:p:208-235
    DOI: 10.1016/j.pacfin.2018.10.010
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    3. Feng, Guo & Tang, Bo & Wen, Jipeng & Yan, Shuo, 2022. "The effect on stock performance of executives' emotions during IPO roadshows," International Review of Financial Analysis, Elsevier, vol. 81(C).
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    5. Mingsheng Li & Desheng Liu & Jing Zhang & Luxiu Zhang, 2021. "Volatile market condition, institutional constraints, and IPO anomaly: evidence from the Chinese market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 1239-1275, March.
    6. Cui, Chuantao & Li, Leona Shao-Zhi, 2023. "Trade policy uncertainty and new firm entry: Evidence from China," Journal of Development Economics, Elsevier, vol. 163(C).
    7. Lee, Chien-Chiang & Ning, Shaolin & Hsieh, Meng-Fen & Lee, Chi-Chuan, 2020. "The going-public decision and rent-seeking activities: Evidence from Chinese private companies," Economic Systems, Elsevier, vol. 44(1).
    8. Lu Jolly Zhou & Mehdi Sadeghi, 2021. "The long‐run role of innovation in the IPO market: inhibition or promotion?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3735-3779, June.
    9. Zhao, Yi & Wang, Nan & Zhang, Luyang & Sun, Baiqing & Yang, Yuchen, 2022. "The greater the investor attention, the better the post-IPO performance? A view of pre-IPO and post-IPO investor attention," Research in International Business and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    IPO underpricing; Industrial policy; R&D; Patent; Information asymmetry;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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