An Analysis Of Firm’s Quality Of Initial Public Offerings Based On Product Market Competition

The capital market is an important joint between capital demand in the real economy and capital supply in the financial market. Initial public offering, namely IPO, is an important way of firms from the real economy to the capital market. Since the beginning of the birth of the capital market, IPO become the focus of stakeholders and scholars, and left a lot of mysteries, such as Underpricing, long-run Underperformance and IPO Waves. For these questions, we not only need to think from the capital market itself, but also from the deeper levels behind the stock price, namely, from the real economy and the firm’s actual operation.This dissertation attempts to study the IPO firm’s quality from an important aspect of operations, i.e., product market competition. Firm’s quality is a complex of the basic resource elements such as size, entrepreneurship, organizational structure, technological innovation and product quality, and its indicators are financial data, for example, the operation profit. For listed firms we can measure firm’s quality by long-run performance of the stock in the secondary market, or by some joint indicators of financial data and secondary market data such as price/earnings ratio, price/book ratio and Tobin’s Q. Compared to private firms, listed firms also face the "death" risk because of exchange’s delisting criteria, so delisting is an extreme performance of firm’s quality. Thus, the survivability is also an important part of the firm’s quality research.Based on existing research results at home and abroad, and through product market competition which is closely contacted with the real economy level, we study and analyze deeper reason of firm’s quality differences. On the basis of the existing product market competition theories, we explore the internal mechanism of product market competition’s impact on IPO firm’s quality and survivability, analyze the competitive effect and information effect, and develop the model in accordance with the actual situation of China. After an empirical research using data of manufacturing industry in Chinese stock market, we draw some useful conclusions and accordingly propose targeted policies and recommendations.This dissertation finds that the impact of product market competition on IPO firm’s quality and survivability is generated by the competitive effect and information effect. Product market competition effect not only affects the decisions and position of competitors in the product market, but also affects the more distant IPO decisions, and their post-IPO long-run operation performance and secondary market performance as well. Therefore, the product market competition effect has a dynamic impact and effect on the entire process before and after firms’ IPOs. On the other hand, IPO process also affects the product market competition itself. Competitive effect is not just a one-sided effect, but an ongoing iterative process.IPO process also affects the distribution of information between the different competitors, and there exists a clear information spillover behavior. When an IPO event occurs, a lot of original private information about the industry is released to the market, such as the IPO firm’s strategy, technology, capital structure, financial situation and key customers, etc. This allows different market participants, especially competitors in the same industry, begin to rethink their future decisions in the product market. The IPO process also influences other competitors’ expectation of the industry outlook by the information effect.The IPO firm’s survivability is undoubtedly a very important measure of the post-IPO firm’s market performance. If a firm faces the critical financial crisis or even bankruptcy, it will be required delist from the exchange market. Therefore, the survival time is another important indicator to measure firm’s long-run performance. If an IPO firm is in a disadvantageous position of competitive effect and information effect, as a result it undoubtedly will face a worse operation performance and be "ended".The empirical studies have found that the degree of industry competition, firm’s market power, financial leverage ratio, innovation ability and other IPO firms’ idiosyncratic factors influence their position in product market competition, affect their long-run performance and quality, and thus determine their survivability.This dissertation suggests that the governor should create a favorable competitive environment to achieve fair competition in the same market conditions, and encourage enterprises to vigorously carry out innovation and improve firm’s quality. The information disclosure system of listed firms should be improved constantly, and the intellectual property rights protection must be promoted. Regulators need to continually improve the delisting mechanism, and actively promote the reform of the issue system and a firm transition to the registration system, and gradually improve the legal system of the entire securities market.The main contribution of this dissertation is in the following aspects:Firstly, from the perspective of product market competition and with the IPO firm’s quality as a starting point, firm’s performance in product market in the real economy has been connected with IPO’s characteristics and post-IPO indicators such as long-run return performance of stocks and firm’s operation. This research greatly expands the vision in long-run return performance of listed firms and is a contribution to existed literatures.Secondly, product market competition and asset pricing are two different academic areas, so less literature has overlapped the two major research areas before. In this dissertation we study the product market competition and IPO firm’s quality, and connect features on product markets with the valuation and pricing at and after IPO. Specifically, we investigate how product market competition influences firm’s IPO decision, long-run performance of stock and operation, and its survivability. We achieve the organic integration of business, financial decisions and asset pricing.Finally, we analyze firm’s product market competition situation and ex-IPO characteristics with its post-IPO performance, and identify the factors that affect the IPO firm’s quality and regular laws. Product market competition situations, information delivery and release have a very important impact on firm’s IPO decision, post-IPO long-run performance and its quality. This is a complement and promotion to previous studies.