The Impact Of R & D Strength On IPO Underpricing

Two anomalies have been existing in the process of initial public offerings (IPOs)-the first-day underpricing and the long-term underperformance of certain IPOs. In the past two decades, scholars at home and abroad carried out extensive research on the topic and proposed a variety of theories and hypotheses. Among them, the theory of information asymmetry and investors’ misevaluation about the issuers has been generally recognized.Various theories have been developed to explain the first-day IPO underpricing, with most postulating the existence of information asymmetry between certain parties to the IPO process. Respectively, the models are predicting that the extent of information asymmetry is positively related to the first-day underpricing.Based on a sample of IPOs in Chinese Growth Enterprises Market issued during2009-2012, this article identifies a widespread source of information asymmetry and valuation uncertainty-the R&D activities of issuers. Furthermore, this article finds that these R&D activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long-term performance (R&D is positively related to long-term performance). Given the pervasiveness and constant growth of firms’R&D activities in modern economies, the identification of R&D as a major factor affecting IPO’s performance contributes to the understanding of this important economic and capital market phenomenon.