IPO Effect From Managerial Shareholding View

With the experience of foreign mature capital market and Chinese unique economic characteristics, the capital market of our country is constantly growing. Experiencing the rapid economic development, the matched capital market must be established to promote the healthy growth of enterprises. Before Growth Enterprises Market have been set, the capital market only consists of The Main Board and the Small and Medium-sized Board. The establishment of GEM enriches the structure of China’s capital market and the financing channels of different types of enterprises, which has the historical significance. With the financing funds, the enterprises are predicted to grow faster than before.Since GEM was established in2009, there were355companies in this market (by the end of2012). Data shows, the market value of listing Corporation was growing rapidly in2000but at the end of2011the market value fell slightly. According to the capital market theory, the company’s share price change reflects the investors’confidence in the company’s future business condition. The lower increasing pace of the GEM market value may be related to the decline in the performance of the listing corporation. By the end of April21th,2010, the statistical data of Wind database shows that70GEM Company’s growth in average net profit rate in2009was only43.37%,2.07percentage points lower than those companies in Main Board. The net profit of four companies even decline, which arouses questions that those decline is accidental or common phenomenon.IPO Effect refers to the decline of financial performance after IPO. According to the researches before, IPO Effect almost exists in every capital market in every country. At present GEM Board still undergoes IPO examination and approval system, which means the currently listed corporation shall be outstanding high-tech enterprises. However, some corporations’ financial performance decline sharply, leading to growth ability of GEM companies questioned. This paper is concerned about the change of performance before and after IPO, in other words, whether IPO Effect exists in our GEM board or not.In recent years GEM Board has become a hot research field. It is widely believed that those listed corporations are better than other unlisted both in financial performance and future development prospect. So there is reason to believe such companies can have relatively good performance after listing. Domestic and foreign research shows, compared to the time before IPO, the financial performance declines widespread after IPO. Previous research selected the study sample in Main Board and SME, and only a few researches dig into GEM. The corporations in GEM are famous for their ability to grow fast, which imply that those may avoid the phenomenon of IPO Effect. From the research perspective, scholars focus on the Earnings Management theory and the Window of Opportunity theory to explain the IPO effect. This paper discusses performance changes before and after IPO in Management Shareholding perspective that enriches the interpretation of the factors impacting on the IPO Effect.China’s GEM IPO Effect research in this paper is divided into two parts. The first is to test the existence of IPO Effect on China’s GEM market, the following is to analyze how management shareholding influences IPO Effect on the basis of empirical research.Based on the evaluation method of the IPO Effect from domestic and foreign scholars, this paper measures financial performance change from the profit ability, growth ability, debt paying ability and operating ability with nine financial performance indicators. After comparing the financial performance before and after IPO, it shows the average financial condition two years after IPO is worse than that before the IPO. This means IPO Effect does exist in GEM board, and the financial performance of those listed corporation decrease a lot. Secondly, on the basis of existence of China’s GEM IPO Effect, this paper goes on to analyze how Management Shareholding influences IPO Effect. The previous studies find that there is no simple liner relationship between managerial ownership and firm performance. The mainstream view is that the management ownership may influence company’s performance with interval effect. In combination with the practical situation of this article, the author thinks management stake and IPO Effect may also exist interval effect, so regression model introduced the management equity percentage with quadratic and cubic indicators. By empirical study, it turns out that managerial ownership has interval effect on IPO Effect and the two presents inverted U-shape.The contribution of this paper also consists of two parts. Firstly, even GEM Board is established for those high-tech corporations, however, their financial performance let both investors and China Securities Regulatory Commission down. According to the empirical analysis, nine financial indicators indicate that corporations do not behave well after IPO. It is very confusing that with raised money why their financial performance decline sharply? In order to know the factors related to IPO Effect, we mainly examine the relationship between management shareholding and IPO Effect. With deep research, this paper discovers that managerial stockholding level have a complicated correlation. This paper uses net profit margin on sales to measure the operating performance change of listed companies and finally finds that managerial stockholding level has a inverted U-share relationship whit the degree of decline of Net Profit Margin on Sales. When managers hold stocks less than44.54%, management equity ratio belongs to entrenchment interval. In this interval, the increase of management shareholding ratio leads to the enhanced IPO Effect. When the proportion of managerial stock is more than44.54%, the management equity ratio belongs to the alignment interval, in this condition the increase of management shareholding gradually diminishes IPO Effect. The conclusion tells that managerial shareholding incentive don’t always narrow down the agency costs. This may be explained by the lack of management oversight. In order to reduce the agency cost the shareholders of corporations give manager equity incentive, but don’t effectively monitor managers’daily activity. When managers acquire these stocks, they are not only the operators of the company but also partly possess the company. They strengthen the control ability to take charge of the corporation, which may take advantage of the information asymmetry to acquire their owner interests instead of the corporations’. At this time management maximize their interests, sacrificing the long-term development of the corporation performance. When managerial shareholding level reaches the proportion witch management can fully control the company, management gains profit from the good performance of corporation more than on-the-job consumption. At this time the management maximizes the company value, so the listed company performs better after the IPO compared to those management shareholding level in a low level.This paper has some unique aspects in the selection of explained variable and control variable. Previous scholars tended to use ROA or EPS as explained variable, but with solid consideration, Net Profit Margin On Sales has been chosen as this paper’s explained variable because it will not be influenced by the asset increase at the IPO point. As the selection of control variable, this paper considers that macroeconomic situation may influence the conclusion. The macroeconomic condition has impact on corporation’s performance, so it is chosen as control variable.