Private Firms' IPO Issuance Examination Time And Its Economic Consequences

Chinese IPO firms have to go through a time-consuming process of examination before listed in the stock market.The average examining time of IPO firms that were approved in 2016 by Chinese Issuance Examination Committee(IEC)is 863 days.To some "unfortunate" IPO firms,this process could take 4 or 5 years.However,after such vigorous examination process,incidents such as IPO fraud scandals,severe profit decline,and mass resignations of top executives are comma in newly listed firms.This raises a question as to whether the issuance examination is effective and what is the relationship between IPO examination time and the phenomena mentioned above.Using a sample of 647 A-share private listed firms from the 2009 to 2012 period,this paper finds that firms experiencing a longer examination time show less profit decline,are less likely to violate law,and their top executives and block shareholders sell less shares.On the contrary,firms quickly passing the examination show serve profit decline,higher probability of violating the law,and their top executives and block shareholders sell more shares.Moreover,firms quickly passing the examination usually have a higher degree of earnings management,possess political connection or issuance examination committee connection.These results imply that the issuance examination is not perfectly effective.High quality IPO firms take a longer examining time to get listed,while low quality firms quickly passing the examination through earnings management,political connection or issuance examination committee connection,which can do damage to the long-run development of capital market.This paper has two contributions.The first one is the introduction of examination time,which has long been overlooked by studies on IPO firms,and this paper shows that examination time is not the signal of corporate quality but a sign of examination failure or rent-seeking.The second one is the finding of mechanisms of why low quality firms quickly pass the issuance examination,and this paper makes several suggestions on how to improve the examining system according to its findings.