An Empirical Study On IPO Excessive Raising Funds And Enterprise Performance Of The GEM

Since the1990s, with the rise of the knowledge economy, a large number ofhigh-tech enterprises developed rapidly, as well as the venture capital industry. A stockmarket is needed objectively for these enterprises in order to meet the needs of venturecapital exit mechanism. While with the subprime mortgage crisis, which outbroke in2007, evolved into a global economic crisis, the financing problem of small andmedium-sized enterprises becomes obvious gradually. This situation needs our country’scapital markets to self-development and self-improvement to meet the enterprise’sfinancing needs of different scale and different development level. Under this background,China set up its own Growth Enterprise Market follow The NASDAQ Market like manyother countries. On October23,2009, China Securities Regulatory Commission held theGEM start ceremony, officially listed in Shenzhen Stock Exchange. As of December31,2012,355companies listed on the GEM successfully. While since the launch of TheGEM, more and more listed companies raise funds excessively. The serious phenomenoncomes from the high growth expectations of the investors, while after more than threeyears of development, the GEM listed companies’ operating performances are far behindthan their financing situations. Operating performance of listed companies falling and thecompanies frequently change the funds’ investment direction that they raised in. Basedon the status quo of the GEM in China, this paper will use empirical method to study theeffects of this high excessively raising money phenomenon to the listed company’sperformance.This paper has a literature review on the current study situation of home and abroad.In abroad, the related study mainly includes IPO is undervalued for a short time、IPO isovervalued for a long time、IPO effect、the use of the excessively raised funds、themotives of listed companies to go public and so on. Domestic research mainly has thefollowing three aspects. One is about whether the listed companies have the IPO effects.The other one is the cause of the performance change before and after the IPO of thelisted companies in China. The last one is the reason which caused the excessively raisingfunds phenomenon and the corresponding governance recommendations. An importantpart of this paper is the IPO financing situation of listed companies in the GEM in China.It has a detailed introduction about IPO conditions in the GEM in China, IPO pricingmechanism and the exit system of the GEM. The paper also has a statistical analysis onthe industry composition about the153sample companies, the result is that substantial business manufacturing firms are dominant in the GEM in China. The quantitativeanalysis about the sample companies showed that excess raising ratio is239.35%onaverage, IPO excess raising funds has become a common behavior of the GEM listedcompanies in China. The companies’ using plan showed that the excessive raised fundsare mainly used on investment and mergers and acquisitions, deposited in banks, repaythe loan and supplementary liquidity, buying property and so on. The reason thatprompted GEM listed companies excessive raise funds involved five aspects, includingthe market system, the publisher, the sponsor agencies, the investors and the financialmarkets and so on. The mechanism that how excessive raised money affect enterpriseperformance includes the following aspects, large numbers of funds would influenceenterprise capital efficiency since they are sit idle, using the excessive raised funds formain business would result excessive investment behavior and this would increase therisk of enterprise operation, huge excessive raised funds induced executives left with cashout and this lead to the loss of the entrepreneurial talent.The paper chooses153companies which listed in Shenzhen GEM before December31,2010, as a sample for empirical research. It choose IPOovrtas the independent variableto study its impacts on the performance of the listed companies, choose ROE to measurethe firm performance, choose CAR to measure the stock’s market performance of thelisted companies, choose lnTA and NAPS as control variables. The regression resultsshow that the IPOovrthas a significantly negative correlation with ROE and CAR. Thesecondary market does not recognize the excessive raise phenomenon caused by the highIPO p/e ratio, this is a wake-up call to the unrealistic high IPO price. Through theoreticalanalysis and empirical test, this paper has two conclusions. One is that it is a widespreadphenomenon in the GEM in China to raise funds excessively, this would has a greatadverse effect on the operating performance and stock market performance of the listedcompanies. The other one is that industry distribution of the GEM market in China is toosingle, mainly manufacturing, and too few companies in other industries. And then givethe following counter measures and suggestions. First, improve the IPO pricingmechanism, increase the small and medium-sized investors’ voice in the pricing andintroduce stock issue system moderately. Second, there should be some strict rules fordirectors, supervisors and senior management personnel when they buy and sell thecompany stock to avoid the GEM to be a place for individual executives to circle money.Third, speed up the implementation of delisting system to make the securities marketoperate healthy and effectively. Fourth, strengthen the supervision to the listed companiesand the sponsor. Fifth, strengthen the education and guidance for investors and bring in strategic investors moderately, in order to improve the structure of investors. Through theabove measures, make our country’ multi-level capital market has a healthy and stabledevelopment.