Government Subsidies and IPO Firms’ Short-Term Excess Returns: Evidence from China

As an important tool for local governments to intervene in the listing process in their jurisdiction, the implementation effect of government subsidy has been quite controversial. This study examines the pricing mechanism of Initial Public Offerings (IPO) within China’s macro institutional environment. The period from April 2012 to December 2015 was selected as the sample observation period, with companies listed on Growth Enterprise Market (GEM) as the study objects. By focusing on IPO firms’ short-term excess returns, the multiple linear regression model and propensity score matching method (PSM) were applied to evaluate the actual impact of local government intervention through financial subsidies during the listing process. The results show that government subsidies improve IPO firm’s short-term excess returns. This promotion effect is more significant in state-owned enterprises rather than in private enterprises. Moreover, the implicit window guidance weakens the promotion effect of government subsidies on the short-term excess returns. Further, the more government subsidies the IPO firms receive, the worse their long-term performance will be. The findings demonstrate that local governments employ financial subsidies to expedite the listing process within their jurisdiction, thereby facilitating IPO companies in generating short-term excessive returns while simultaneously impeding the normal production and operation. The conclusion enhances theoretical understanding regarding high underpricing, while also offering investors a novel approach to interpreting government subsidy information and assessing IPO firm’s earnings sustainability.