The Impacts Of Private Equity On Corporations Listed On China’s GEM Board

Private equity (PE) invests in corporations’ equity with funds raised from organizations and individuals privately, and benefits when the invested corporations become listed, merged or acquired. PE, which sprouted in the1940s America, developed rapidly and continuously in the last seventy years and become an important part of the modern financial industry. In recent years, with the rapid development of China’s financial industry, PE has showed a very strong vitality.The PE’s profit model connects itself with the invested corporations and there may be positive or negative interaction between these two. On the one hand, experienced PEs will choose innovative corporations to invest in, and those innovative corporations also need supports from PE. This positive interaction benefits both PEs and the corporations. On the other hand, inexperienced PEs believe any investment in corporations attempting to list will be able to reap huge profits after their listing, and some corporations do not want any involvement in its management from PEs. This negative interaction is bound to hinder the healthy development of the PE industry and prevent innovative corporations from their sound development. Existing studies suggest that these two types of interactions are simultaneously exist between different PEs and the invested corporations.This article aims to explore whether the current interaction between PEs and the invested corporations is positive or negative. Specifically, this article studies the effects of PE on invested corporations’ governance and operation, the issuing and listing, and the price performance after listing. This article’s structural arrangements and core contents are listed as follows:Chapter1is introduction. This article’s background, purpose, significance, structure and innovations are introduced.Chapter2is practical introduction and literature review. Since the research and existing theories in this article are based on the characteristics of both PEs and corporations listed on GEM board, this chapter first introduces the relevant background. A review of existing literature is followed, describing five main theories and relevant empirical results.Chapter3is the empirical design. Firstly, this chapter introduces this article’s empirical structure, which is discussing the effects of PE on corporations’ governance and operation, the issuing and listing, and the performance after listing orderly and discussing different types of PEs at last. Secondly, this chapter analyzes the existing literature and China’s actual situation. Thirdly, selected samples, data sources and a simple descriptive statistics are introduced.Chapter4is governance and operation. This chapter mainly discusses the impact of PE on the corporations’ internal governance structure and operating performance. This chapter first comes to the conclusion that PEs can significantly improve the invested corporations’ internal governance structure using means comparing and binary choice model. Then, this chapter studies the impact of PE on the invested corporations’ operating performance using panel data model. The results show that a corporation’s operating performance is influenced by its internal governance structure, financial leverage, operational capabilities and other aspects, and PE can lower a corporation’s operating performance indirectly by crowding out some shares of the biggest shareholder and reducing the financial leverage. Additionally, corporation’s adverse selection also leads to the negative correlation of PE’s share proportion and the corporation’s ROE before listing. However, after the corporation is listed, PEs’ positive effects on its operating performance will be gradually revealed, which indicating that the PEs can indeed positively influence the invested corporations by incentives or other ways.Chapter5is issuing and listing. This chapter discusses the impact of PE on the corporations’ approval rate and the duration of getting listed. This chapter begins with a binary choice model which comes to the conclusion that PEs can increase the invested corporations’ approval rate the authority to a certain extent. Then, this chapter studies the impact of PE on the corporations’ duration of getting listed using the Cox model. However, no significant relationships are found.Chapter6is the price performance after listing. This chapter discusses the impact of PE on the corporations’ short-term price performance after listing (i.e., IPO underpricing) and long-term price performance after listing (i.e., long-term weakness). And the estimation results indicates that PEs will increase the degree of the listed corporations’ IPO underpricing to some extent while has no significant relationship with their long-term price performance.Chapter7comparing different types of PE. As the remaining chapters treat all the PEs indiscriminately by default, this chapter studies the characteristics of different types of PE with classifying PEs by reputation, investment stage and the background and does reach some meaningful conclusions. For example, with respect to the mature PEs, the immature PEs are more likely to become targets of inferior corporations’ adverse selection. However, the mature PEs also failed to screen out the inferior corporations.Chapter8is conclusions. This chapter summarizes the main conclusions of this article and does not generalize there is only positive or negative interaction between the PEs and the listed corporations, but shows different aspects of the interaction which is titled "concurrent control". In addition, this chapter also points out the weakness of this article and discusses the follow-up research.This article does not just study one or two aspects but all possible aspects of the effects of PE on corporations listed on GEM board, and discusses different types of PEs. In this way, the study is more comprehensive and the conclusions can confirm and be confirmed with each other. In such comprehensive study, this article reaches the conclusion that there is a "concurrent-control" relationship between PEs and has the following innovations:1. This article comprehensively studies the impact of PE on corporations’ operating performance in report period and after listing using panel data model;2. This article scientifically and rigorously studies the impact of PE on listed corporations’ duration of getting listed using the Cox model;3. By assuming that optimistic investors will enlarge the certificate role of PE, this article combines both theories of IPO underpricing based on primary market and secondary market, and uses it to explain the impact of PE on listed corporations’ IPO underpricing rate.