The Impact of Foreign Strategic and Corporate Investors on H‐Share IPO Performance

• Published date: 01 December 2016
• Author: Louis T. W. Cheng,Tak Y. Leung,Paul Brockman
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/ajfs.12156

The Impact of Foreign Strategic and

Corporate Investors on H-Share IPO

Performance*

Paul Brockman

College of Business and Economics, Lehigh University

Louis T. W. Cheng**

School of Accounting and Finance, Hong Kong Polytechnic University

Tak Y. Leung

LSK School of Business & Administration, Open University of Hong Kong

Received 28 October 2015; Accepted 16 October 2016

Abstract

Since 1993, foreign institutional investors (strategic and corporate) have been permitted to

invest in Chinese companies listed in Hong Kong as H-shares. We examine the impact of

strategic and corporate investors on H-shares before, during, and after their IPOs. We observe

that strategic and corporate investors select their investment candidates based on specific pre-

IPO firm characteristics. The certification effect of corporate investors generates a significantly

positive effect on outside investor demand. In addition, the presence of foreign institutional

investors, particularly strategic investors, and post-IPO performance are positively related.

Overall, we document a positive effect of foreign institutional investors on H-firms.

Keywords Corporate investor; Foreign institutional investor; H-shares; IPO; Strategic investor

JEL Classification: G14, M13

1. Introduction

This study examines the influence of foreign institutional investors (FIIs), both

strategic investors (SIs) and corporate investors (CIs), on H-share IPOs in Hong

Kong. In the past two decades, China has effectively used H-share IPO listing on

*We are grateful for comments from Eva Chan and seminar participants at the University of

Strathclyde. This research project was financially supported by the Research Grants Council

of the Hong Kong Special Administrative Region, China (Project No. 145608) and the School

of Accounting and Finance of Hong Kong Polytechnic University (Project No. 1-ZV3R).

**Corresponding author: Louis T. W. Cheng, School of Accounting and Finance, Hong Kong

Polytechnic University, Hung Hom, Hong Kong. Tel: +852-2766-7140, Fax: +852-2356-9550,

email: louis.cheng@polyu.edu.hk.

Asia-Pacific Journal of Financial Studies (2016) 45, 886–915 doi:10.1111/ajfs.12156

886 ©2016 Korean Securities Association

the Main Board of the Hong Kong Stock Exchange (HKEx) to privatize its major

state-owned enterprises (SOEs), including 86 firms up till January 2008. While still

maintaining the state’s ownership control, these H-share IPOs allow the Chinese

government to tap foreign capital through the Hong Kong market. The success of

these Chinese H-share IPOs is revealed in their number, market capitalization, and

turnover. Among the three Chinese firms that rank in the ten largest companies in

the world by the Financial Times 2012 Global 500 ranking (i.e., PetroChina Co Ltd,

Industrial and Commercial Bank of China, and China Mobile), two of these firms

are H-shares. Indeed, H-shares have come a long way since Tsingtao Brewery Com-

pany Limited listed in Hong Kong as the first H-share IPO in 1993. During the past

20 years of H-share existence, the participation of FIIs in the form of equity owner-

ship has become an increasingly important phenomenon. For the 10 years leading

up to 2002, there are only eight H-share firms with FII participation. Over the fol-

lowing 6 years till January 2008, FIIs invested in an additional 35 H-share firms.

The IPO literature is extensive. More relevant to our topic are studies that

examine the use of IPOs to achieve government-supported privatization programs

(e.g., Megginson et al., 2004), and studies that investigate the influence of foreign

ownership on IPO performance (Boubakri and Cosset, 1998; D’Souza et al., 2000).

Although earlier studies of Chinese firms suggest that foreign ownership can

improve corporate performance (Sun and Tong, 2003; Xu et al., 2005; Chen et al.,

2006), the impact of foreign ownership on H-share performance is an open empiri-

cal question —with mixed results to date. Aharony et al. (2000) find that H-shares

perform relatively well, while Jia et al. (2005) conclude that H-shares underperform

relative to market index benchmarks. Huang and Song (2005) find that the perfor-

mance of H-share firms deteriorates after IPO listing. Finally, McGuinness and Fer-

guson (2005) provide some initial evidence that the participation of FIIs does not

appear to improve H-share performance.

Although many aspects of IPOs have been examined in the literature, the

impact of FII participation on the underlying firms —before, during, and after

their IPOs —has received little attention. Therefore, the main objective of this

study is to examine the impact of FIIs (both strategic investors (SIs) and corporate

investors (CIs)) on the performance of H-share IPOs. Our paper differentiates from

previous studies in two aspects. First, while SIs and CIs exist in many parts of the

world they only become significant players in the Chinese H-IPO market, making it

possible for this study to focus on their short-term and long-term effects. Second,

we add new dimensions in the analyses in terms of invested firm characteristics

before IPOs, IPO demand, and post-IPO long-term financial performance, which

have not been examined previously.

We use three empirical tests to explore whether the presence of SIs and CIs and

value of H-shares are positively related. First, we examine the selection criteria used

by FIIs in choosing Chinese firms in which to invest during the pre-IPO period.

Next, we examine the impact of SI and CI participation during the IPO process on

investor demand for the underlying H-shares. We expect IPO investor demand to

The Impact of Foreign Strategic and Corporate Investors

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