Financial Market Development,Information Assymetry And IPO Performance

China's financial market has ushered in decades of gold development along with rapid economic growth.In the past developing periods,China's financial market has played an increasingly important role in information transmission and resources allocation.However,the disparity among regional provincial financial markets exists and impacts firms located in different regions on their behaviors,including investment and financing decisions,IPO choices,M&A choices,accounting performance,and stock price performance,etc.Compared with other company behaviors and events,IPO underpricing theory is deeply rooted in the information asymmetry theory and relies more on market information transparency.In the IPO pricing process,the main participants include issuers,underwriters and investors.The information asymmetry between them directly leads to the IPO underpricing.Therefore,the pricing behavior of IPO is more sensitive to financial market development compared with other firm choices.Therefore,this paper intends to study whether the short-term and long-term performance of the firm's initial public offering(IPO)will be impacted by the financial market environment.The main findings of this paper are as follows.Firstly,this paper shows that financial market development varies across different regions in China,and hence IPO performance for enterprises located in different regions differs significantly.Thesummary statistics shows that more developed regions enjoy more resources from banks and securities companies.The average IPO underpricing of firms located in better developed financial markets is only 117.2%,while it is 139.1%for firms located in the developing regions.Meanwhile,the average number of IPOs during our sample period is 34 for developing regions,while it is 68 for developed regions.Additionally,firms located in better financial markets enjoy better long-run performance.Based on the above findings,this paper analyzes the reasons for the impact of financial market development on IPO underpricing.We find that companies in developing regions tend to be underwrited by top underwriters.Due to the "oligopoly" situation in China's underwriters' market,head underwriters often demand higher underpricing.Thus,for companies in developing regions,their IPO may be underpriced more.Additionally,we find that the differences in bank credit will lead to the differences in IPO underpricing for two main reasons.(1)bank-firm relationship conveys information for IPO investors and thus reduce the information asymmetry to this end.(2)easier access for credit resources mitigates the need for issurers to underprice to ensure the success of the issuance.Furthermore,this paper finds that investors' expectation of liquidity in the secondary market after the listing of the company will directly affect their needs for liquidity compensation,thus affecting the degree of IPO underpricing.The empirical findings suggest that financial market development will significantly reduce the IPO underpricing and benefit long-run performance of IPOs.In addition,this research design includes the impact of financial market reform as a dynamic check of our main results.This study is thus a pseudo-multinational study without the bias that can result from observable or unobservable between-country heterogeneity.Prior research proposes the information asymmetry hypothesis to explain the abnormal underpricing of IPOs and our arguments and evidence are rooted in this hypothesis.To be sure,this paper finds evidence that financial market development reduces IPO underpricing through strengthened market transparency and reduced information asymmetry.This research thus adds to the growing literature on the impact of market transparency on asset pricing.Additionally,this paper provides evidence suggesting that SOEs have information and capital access advantages compared to non-SOEs,therefore,non-SOEs are more sensitive to financial market development.Thus,our results suggest that,even though China has been rapidly developing in recent years,non-SOEs are still disadvantaged in terms of access to capital and information.Furthermore,this paper sheds additional light on financially constrained firms' financing decisions.Our results suggest that the impact of financial market development is greater for financially constrained firms,since they are more eager to ensure the success of their IPOs by means of underpricing.Finally,this paper finds the impact of financial market development persists beyond IPO initial underpricing.The one-year and three-year BHAR results indicate that firms located in better-developed financial markets perform better in the long run.Based on the above research findings,this paper proposes the following policy recommendations:(1)Promote the balanced development of financial markets and promote financial equity;(2)Continue to promote financial market reform,steadily improve market resources and information allocation efficiency for the economy.(3)Practically promote the common development of the intermediary market and the stock market and optimize the resource allocation path and efficiency.