Short‐Term Performance of U.S.‐Bound Chinese IPOs

Date01 February 2015
Published date01 February 2015
The Financial Review 50 (2015) 121–141
Short-Term Performance of U.S.-Bound
Chinese IPOs
K. Stephen Haggard
Missouri State University
Brian R. Walkup
The University of Tulsa
Yao yi X i
University of Kansas
Firms from emerging markets, including China, increasingly seek to raise capital outside
of their home markets. We examine theshort-term performance of U.S.-bound Chinese initial
public offerings (IPOs) and find that these IPOs have significantly lower underpricing than a
matched sample of U.S. counterparts. We also findthat the magnitude of IPO underpricing for
U.S.-bound Chinese firms is positively related to revisions in offer price.
Keywords: IPO, underpricing, U.S.-bound Chinese IPOs, offer price revision
JEL Classifications: G15, G32
Corresponding author: School of Finance, Operations Management & International Business, Collins
College of Business, The University of Tulsa, 800 South Tucker Drive, Tulsa, OK 74104; Phone: (918)
631-2933; Fax: (918) 631-2037; E-mail:
Haggard wishes to thank the Financial Research Institute at the University of Missouri for their support
of this research. Xi wishes to thank the University of Kansas for their support. The authors would like
to thank the Editor, Robert Van Ness, two anonymous referees, and participants at the 2013 Southwest
Finance Association Annual Meeting for their valuable input.
C2015 The Eastern Finance Association 121
122 K. S. Haggard et al./The Financial Review 50 (2015) 121–141
1. Introduction
From 1980 to 2011, 7,612 firms “went public” through initial public offer-
ings (IPOs) in the United States, although the volume varies year to year (Ritter,
2012a). The primary reasons for IPOs are to raise equity capital for firms and to
create markets for founders and early investors to cash out a portion of their own-
ership (Ritter and Welch, 2002). While most studies of IPOs focus on the U.S.
market, IPOs are clearly present in other markets. For example, Loughran, Ritter and
Rydqvist (1994) show 5,216 IPOs from 1959 to 1992 in 24 non-U.S. countries and
Moshirian, Ng and Wu (2010) study 4,439 IPOs from 1991 to 2004 in six Asian
While the majority of firms raise capital in their “home” market, it is not unusual
for firms, especially emerging market firms, to go public in a more developedforeign
market (Gozzi, Levine and Schmukler, 2010). As a well-developed capital market,
the United States is the destination of choice for many of the firms that choose
to raise equity capital in foreign markets. Listing on U.S. exchanges, according to
Doidge, Karolyi and Stultz (2004), gives foreign companies the opportunity to raise
capital overseas without the restrictions of their domestic financial markets, which
might limit the amount of capital they are allowed to raise from foreign sources.
Such listings also benefit these firms by allowing them to raise capital at lower cost
than in their home markets, as the U.S. market is more liquid (Doidge, Karolyi
and Stultz, 2004). Furthermore, the authors argue that the stricter requirements of
U.S. exchanges enhance the protection of the firms’ minority shareholders, since
such requirements make it more difficult for controlling shareholders to expropriate
wealth from minority shareholders. Reese and Weisbach (2002, p. 65) show that
listing in the United States “increases the expected cost to managers of extracting
private benefits, and commits the firm to protect minority shareholders’ interests.”
This increased protection increases the value of the issuing firm’s shares to minority
shareholders, allowing firms to raise more capital in exchange for parting with the
same percentage of the firm’s equity.
With the growth of emerging markets, many firms in fast-growing developing
countries now prefer to go public overseas to take advantage of these benefits. As
an example, Chinese companies increasingly go public in the United States. As
shown by Ritter (2013), the percentage of Chinese IPOs in the United States has
been increasing, although the number varies year to year. Many studies examine the
performance of Chinese firms that go public in their domestic stock market (see Chan,
Wang and Wei, 2004; Chen, Firth and Kim, 2004; Chi and Padgett, 2005; Wang,
2005). The main results of these studies are that the general patterns of short-run
underpricing and long-run underperformance hold in the Chinese market, although
long-run underperformance is found to be less severe than in the United States (Chen,
Firth and Kim, 2000). To our knowledge, the performance of the Chinese firms that
go public in the U.S. market has yet to be explored.

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