Government certification and IPO initial returns under the registration-based system: new evidence from Chinese stock markets

This study explores the influence of government certification on Initial Public Offering (IPO) initial returns in China’s stock market post the registration-based reform. Applying stochastic frontier analysis (SFA), we dissect initial returns into deliberate underpricing and aftermarket mispricing components. By examining all 1312 companies under the registration regime that have listed on the Chinese stock market between 2019 and 2023, our results show that government certification of ‘Specialized and Sophisticated Enterprises’ (SSE), especially the national ‘Little Giant’ certification, significantly reduces both components of initial returns. The certification policy is shown to decrease initial returns by mitigating price volatility and speculative fads. Small and medium-sized enterprises (SMEs) benefit more from this policy, suggesting that government certification plays a crucial role in enhancing IPO pricing efficiency. This research contributes to the IPO literature by highlighting the government’s third-party certification effect and the signalling effect, and hence its impact on financial market behaviours.