Pricing and long-run performance of IPOs in China : the effects of change in accounting standard

Abstract

China changed its accounting regulation in 1998 by replacing the old "Accounting Regulation for Experimental Listed Companies" with the new "Accounting Regulation for Listed Companies". My thesis investigates the effects of such change in accounting regulation on the IPO market in terms of pricing and long-run performance of the IPO shares. Specifically, I examine whether the new accounting regulation improves the association between earnings and IPO offering price and leads to a stronger relationship between earnings and IPO underpricing (which is defined as returns from the offering price to the first-day closing price). In addition, I also study whether there is an increase in the association between accounting numbers and IPO long-term stock performance after the adoption of the new accounting regulation. The main contributions of my thesis are as follows. First, by analyzing the differences between the new accounting regulation and the old one, I find that accounting information under the new one is of higher earnings quality and is more credible than that under the old one. Consequently, improvement of earnings quality has positive effects on IPO pricing and IPO long-term stock returns. Second, I develop testable hypotheses regarding the effects of accounting standard on the pricing and long-run performance of IPOs. These hypotheses concern with how accounting standard affects (i) the relationship between earnings per share (EPS) and IPO offering price, (ii) the relationship between return on assets (ROA) and underpricing, and (iii) the relationship between earnings changes and IPO‘s long-run stock performance. Third, based on a sample of Chinese IPOs listed from 1996 to 2004, I find a positive relationship between EPS and offering price, and a negative relationship between ROA and IPO underpricing during the whole sample period. Furthermore, the relationship between EPS and offering price becomes more positive and the relationship between ROA and IPO underpricing becomes more negative after the adoption of the new accounting regulation. The majority of my findings are robust to alternative estimation methods and alterative measurements of earnings. In addition, I measure IPO long-run performance by calculating the IPOs‘ cumulative abnormal return (CAR) up to either a 2-year or 3-year period. My empirical results show that the relationship between these CARs and IPOs‘ earnings changes has been strengthened by the new accounting regulation. In summary, my thesis indicates that accounting standard can be a proxy for information asymmetry and influence the relationship between IPOs‘ accounting numbers and their performance. My empirical results complement the existing IPO literature by showing that Chinese IPOs not only react to accounting numbers but also earnings quality.