The Study Of IPO Effect In Hong Kong Growth Enterprise Market

IPO effect is one of the concerning issues in the areas of financial economy and accounting in recent years. The so-called IPO effect refers to the empirical fact that the operational performance of a company rises before IPO, peaks at IPO, and declines after IPO. The trajectory of the operational performance looks like an inverted V. Investors, while making investment decisions, often use historical performance data to predict the future profitability of the company, and thus determine the risks and benefits of the investment. The existence of IPO effect makes investors doubt the validity of the decisions based on historical performance data, and increases the uncertainty of the investment. As a stock market which bears great innate risk, growth enterprise market also may suffer from IPO effect. For investors, the answer of the following question is especially important. Dose IPO effect exists in a particular stock market? Which factors have significant impact in IPO effect? To find an answer to this question, scholars all over the world had done a great deal of empirical research, and find out that IPO effect exists in all most all the major stock market in the world. To explain the cause of IPO effect, the mainstream view is from the perspective of earnings management, the phenomenon that corporate management may manipulate pre-IPO performance of a company in order to obtain higher listing price and thus increase their own wealth, which will result in the declining of company performance after IPO. However, most of the studies concerning IPO effect focus on main board markets, and the growth enterprise markets are rarely involved.The focus of this paper is the existence of IPO effect in Hong Kong growth enterprise market and the factors that may impact the IPO effect. The reasons to choose Hong Kong market are two folds. Firstly, the latest research of IPO effect in Hong Kong market was conducted at 2004, whose results may no longer in effect. Secondly, the study of Hong Kong growth enterprise market may provide constructive advices to mainland growth enterprise market. The empirical research in this paper uses the 221 companies listed in between 1999 and 2006 in Hong Kong growth enterprise market, in order to judge the existence of IPO effect. To find out the factors that may impact IPO effect in Hong Kong growth enterprise market, the sample are sub grouped into VC background, main business location and industry. Finally, suggestions are made based on the results of the empirical research and the characters of the mainland grow enterprise market.This paper includes three parts.Part 1 (chapter 2) is the summary of researches done concerning IPO effect. We have summarized the basic theory of IPO and the theory of abnormal phenomenon in IPO, and then explained IPO effect in detail, including researches conducted and theories brought up by senior scholars.Part 2 (chapter 3 and 4) is the body of this paper, and includes the design of research method, the tests about the existence of IPO effect in Hong Kong growth enterprise market, and the tests concerning factors that may impact the IPO effect. ROA is chose as the index to measure company performance, and the pre-IPO ROA is compared with post-IPO ROA. If the difference is statistically significant, we can conclude that IPO effect exists. The conclusions made in this paper are as follows.(1) IPO effect exists in Hong Kong growth enterprise market. This is mainly because the information asymmetry which may lead to earnings management of IPO firms.(2) Venture capital has significant impact on IPO effect in Hong Kong GEM. The empirical research shows that sample group with VC background exhibits IPO effect. This is due to the withdrawal of venture capital through IPO. In the starting stage of a company, venture capital does not only provide cash the company needs, but also provides the company with professional instructions on corporate management to increase profitability of the firm. Once VC has withdrawn, the company may suffer from the impact of the lacking of professional management. Thus, the performance of the company may fall after IPO.(3) The location of main business has significant impact on IPO effect in Hong Kong GEM. The empirical research shows that the sample of overseas company exhibits IPO effect. The companies whose main businesses locates in mainland China out-performs Hong Kong and overseas companies.(4) Industry has significant impact on IPO effect in Hong Kong GEM. The information industry exhibits IPO effect. The change of the performance of manufacturing industry is comparatively steady.Part 3 (chapter 5) gives advices on mainland growth enterprise market. Based on the empirical results and the characteristics of mainland GEM, suggestions are given as follows.(1) Pay great attention to the quality of firms to be listed, and tighten supervision on listed firms. Carry out sponsor system.(2) The government should find a way to support the growth of venture capital which companies should focus on corporate governance in order to reduce the impact of the withdrawals of venture capital.(3) The government should provide preferential policy to small and medium sized firms, broaden the financing channels of these firms, in order to increase growth and attract them to be listed on China GEM.(4) The industry distribution of GEM listed companies should be diversified. As long as the company has growth potential and innovation capacity, they should have opportunity to list on the GEM.