Private Equity Investment And Ipo Discount

Based on grandstanding theory and signal theory, this paper investigates the role of PE backing in the IPO underpricing of Chinese firm from the aspect of PE’s background and PE’s lockup. We find that the IPOs of PE-backed firms are more underpriced than non-PE backed firms. This means PE-backed firms are willing to underprice the issue price. Besides this, firms financed by government-sponsored PE have the largest IPO underpricing. Lastly, comparing to the other companies, PE volunatarily choose a longer lock-up period will have a lower IPO discount price.This means that Chinese market meets "Grandstanding Theory". Government-sponsored PE is regarded as a company lack of investigating and monitoring skills, besides this, it has a responsibility to provide public good which has low performance. In that case, they have to lower the IPO price in order to be listed in the stock market. According to the grandstanding theory, government-sponsored PE has the motivation to exit quicker in order to gain the reputation to get more money, so they are willing to choose a higher IPO underpricing. Besides this, based on signal theory, the PE voluntarily choose to a longer lock-up period is a positive signal can be interpreted as PE has confidence on the company’s future development, and willing to continue to implement the supervision and management functions in the company after the IPO in order to get the capital gains from company growth. Therefore, on the basis of the positive signal, the capital market gives the company a higher share price. So the IPO discount rate is low.