That companies don’t do as well post-IPO as in their run up is a well documented phenomenon the world over. The reasons for this vary.
In the paper highlighted today Hai Long (et al.) from the Business School, Wuchang University of Technology (Wuhan), writing in the Journal of Risk and Financial Management, takes a closer look at the phenomenon in China’s Growth Enterprise Market (Shenzhen).
In the process a major difference between IPOs in China and elsewhere is highlighted. In China an IPO candidate is effectively ‘selected’ by the China Securities and Regulatory Commission (CSRC) after due diligence. In Hong Kong and elsewhere there’s a rule-book and if a listing prospect adheres to the rules they can proceed.
This need to please a de facto Selection Committee though appears to be one of the main reasons stocks listed on China’s GEM behave quite differently before their listing and after.
Of the 200-companies observed in the period 2015~2019 there was a clear tendency to spend money on business development prior to the IPO but then afterwards, armed with a lot of Other People’s Money, there was a switch to equity investment to please the new shareholders.
The net effect of this strategic chop and change was precisely what the CSRC Selection Committee was doubtless trying to make sure didn’t happen i.e. it led to the the transition, post listing, to operating performance declines and firm-value deterioration.
More grist, as if any were needed, for the avoid-IPOs-if-you-can mill.
You can read the article in full via this link Post IPO Experience
Happy Sunday