Choice of IPO Location and Long-Term Performance:

The Case of Chinese Real-estate Firms

Cathy Q Wei ， Kelvin S K WongJune 2009

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Motivation

Observation 1: Chinese firms’ IPO results exhibited sharp difference from in other countries, almost all of which document performance improvement in the long run (Fan, Wong and Zhang, 2007).

Observation 2: Some Chinese real-estate firms issued shares in the Hong Kong capital market, while the others in the same industry chose to privatize in China (for example, Beijing Capital Land Ltd. in HK while Yihua Real Estate Inc. in China).

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Motivation (Cont’d)

“One of them (County Garden, China Aoyuan, SOHO China etc. )told the press that they chose the HK market for IPO because they believe listing in HK (instead of Shanghai or Shenzhen) will help to promote their image/good will .”

“the main purpose of listing of the 4 major BANKS in HK is not to raise money as they are not short of case but the government's strategy to improve the BANK's management and governance.”

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Overview

This project first intends to examine how IPOs in capital markets affect Chinese firms’ long term performance.

More importantly, it will also shed light on why firms in the same industry chose their IPOs in different capital markets and whether such choices created difference in firms’ long-term performance. This will provide implications for both firms’ IPO strategies and government policies.

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Related Literature

Firm IPO and post-IPO performance: -- Jain and Kini (1994), Brav and Gompers (1998), Gompers and Lerner (2003)

IPO, Self selection, and moral hazard/monitoring:

-- Self-Selection and Agency Issues in IPO: Ritter and Welch (2002),

Netter and Magginson (2001) Pagano and Röell (2006) -- Selling Mechanism in IPO: Vandemaele (2003) -- Information Disclosure in IPO: Schrand and Verrecchia

(2005)

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Related Literature

Firms’ privatization and long term performance:

Megginson, Nash, and Randenborgh (1994), Boubakri and Cosset (1998), D’Souza and Megginson (1999), Megginson, Nash, and Schwartz (2000), and Dewenter and Malatesta (2001), Megginson and Netter (2001), Djankov and Murrell (2002), and Chong and Lopez-De-Silanes (2002).

Chinese firms’ privatization and long-term performance:

Fon, Wong, and Zhang (2007)

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Data

Data Source: --Hong Kong Exchanges and Clearing Limited

--Shanghai Stock Exchange --Shenzhen Stock Exchange --Datastream

17 real-estate firms going public in Hong Kong

36 real-estate firms going public in Shanghai or Shenzhen

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Hypothesis

Hypothesis 1:

On average Chinese real-estate firms which issues shares in the HK capital market document better long-term performance than those in the Chinese capital market.

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Hypothesis

Hypothesis 2.1 (self-selection): Chinese real-estate firms which issue shares

in the HK capital market have better pre-IPO performance than those in the Chinese capital market.

Hypothesis 2.2 (monitoring) : Chinese real-estate firms which issue shares

in the HK capital market does not have better pre-IPO performance than those in the Chinese capital market

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Hypothesis

Hypothesis 3.1 (Self-selection): The post-IPO performance change of Chinese

real-estate firms which issue shares in the HK capital market is not different from that of those firms in the Chinese capital market.

Hypothesis 3.2 (monitoring): The post-IPO performance change of Chinese

real-estate firms which issue shares in the HK capital market is larger than that of those firms in the Chinese capital market

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Methodology

For Hypothesis 1: Use standard OLS model to test the

causality between post-IPO performance and IPO location choices.

Use seasonality-excluded OLS model to test the causality between firm-specific performance and IPO location choices.

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Intuition

First, if firms going public in Hong Kong exhibited higher changes of post-IPO performance than those going public in China, then this is consistent to the theory of monitoring.

Otherwise, it is more consistent to the theory of self-selection.

Second, if firms going public in Hong Kong had better pre-IPO performance that those going public in China had, then this is consistent to the theory of self-selection.

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Intuition

If monitoring is the key drive for firms’ choice of IPO location, then (1) firms should choose the more established capital market (such as Hong Kong) for IPO, and (2) government should devote more resources to improve post-IPO monitoring in the capital market.

If self-selection is the key drive for firms’ choice of IPO location, then government should impose more strict disclosure requirements for IPO firms.

If government policies in the real-estate market affects firms’ choice of IPO location, or if policies affect firms’ post-IPO performance, the empirical results may also provide implications for government policy design.

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Summary Statistics

Univariate statisticsreturn rate mv

mean -0.6425599 7325.03389standard deviation 0.10009211 11559.0761standard error of the mean 0.01668202 1926.51268

minimum -0.828548 831.12median -0.6632017 3449.665maximum -0.4267913 62437.62range 0.40175671 61606.5

skewness 0.395 3.702kurtosis -0.306 15.505

number of observations 36

Real Estate Firms Listed in China Stock Market(1992-2008)

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Summary Statistics

Real Estate Firms Listed in Hong Kong Stock Market(1992-2008)

Univariate statisticsreturn rate mv

mean -0.1552057 22813.9478standard deviation 0.46490288 22650.0091standard error of the mean 0.11275551 5493.43411

minimum -0.8 1236.81524median -0.1823824 18727.9496maximum 0.49761905 96416.5212range 1.29761905 95179.7059

skewness -0.012 2.275kurtosis -1.494 6.838

number of observations 17

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Comparison of returns in different markets

Regression: return rateconstant dummy

coefficient -0.1552057 -0.4873542std error of coef 0.06628031 0.08042133t-ratio -2.3417 -6.0600p-value 2.3143% 0.0000%beta-weight -0.6470

standard error of regression 0.27328073R-squared 41.86%adjusted R-squared 40.72%

number of observations 53residual degrees of freedom 51

Dummy =0 if firms listed in Hong Kong =1 if firms listed in Mainland China

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Comparison of returns in different markets

Regression: return rateconstant mv dummy

coefficient -0.0607198 -4.142E-06 -0.5515028std error of coef 0.084377 2.3599E-06 0.08689185t-ratio -0.7196 -1.7550 -6.3470p-value 47.5106% 8.5386% 0.0000%beta-weight -0.2025 -0.7322

standard error of regression 0.26787277R-squared 45.24%adjusted R-squared 43.05%

number of observations 53residual degrees of freedom 50

Correlation between MV and Dummy is -0.42

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Firm-specific effects

Given the limited number of observations , we cannot include any fixed timing effect in the regression;

Instead , we focus on daily return rates in 2008 and use the following approach:

Step 1--For each firm, we run the following regression.

Return rate-riskfree return=a+b*(capital market return-riskfree return)

The coefficient alpha captures firm-specific performance which is not correlated with the whole stock market variation and other uncertainties.

Step 2—We compare whether there is a significant difference in firm-specific performance between those firms listed in Hong Kong and those in mainland China.

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Comparison of firms-specific effects

Regression: alphaconstant dummy

coefficient 0.12326052 -0.1230913std error of coef 0.0692188 0.08398674t-ratio 1.7807 -1.4656p-value 8.0912% 14.8895%beta-weight -0.2010

standard error of regression 0.28539642R-squared 4.04%adjusted R-squared 2.16%

number of observations 53residual degrees of freedom 51

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Conclusion and next step

All the above results suggest that indeed real estate firms listed in Hong Kong exhibited better performance than those in mainland China.

We will then compare firms’ Pre-IPO performance to Post-IPO performance to distinguish the two possible reasons: self-selection and monitoring.