Work

Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets

Year: 2022

Type: article

Abstract: From 2007 to 2020, unlisted Chinese firms paid an average of over US $500 million to listed firms for their shell value in reverse merger transactions. We show that this large shadow price for a public listing sheds light on other features of Chinese markets, including (i) near-zero mortality rates, (ii) frequent major-asset restructurings (MARs), (iii) insensitivity of small-firm prices to corporate earnings, and (iv) a large size effect. A firm-level measure of expected shell probability (ESP) predicts stock returns, MARs, earnings-to-price sensitivity, and short-window returns to initial public offering-related regulatory news. Furthermore, adding ESP to existing pricing models for Chinese stocks significantly improves model performance.

Source: European Finance Review

DOI: 10.1093/rof/rfac044

Authors: Charles M C Lee, Yuanyu Qu, Tao Shen

Institutions: University of Washington, Stanford University, University of International Business and Economics, Tsinghua University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: National Natural Science Foundation of China

Awards: G4101244849, G7117792081