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PostIPO-Performance:AComparative

AnalysisbetweentheUSandChina.

Thispaperdiscussesandanalysesthepost-IPOlong-termperformanceoffirms

inacross-countryanalysisoftheUnitedStatesandChina.Usingdataon84US

IPOs and 53 Chinese IPOs, I find that the firms that go public in the US

outperform the firms that go public in China. Large impact on the long-term

post-IPO performance is the industry in which the firm operates, with non-

technologyfirmssignificantlyoutperformingtech-firms.

Name:BartdenHartog

UniversityofGroningen

FacultyofEconomics&Business

Study:DDMInternationalFinancialManagement

Date:08-01-2016

Supervisor:M.Kramer

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1.IntroductionToday’s modern and globalized economy enables firms to obtain capital in

variousways.Onepossibilitythatgainedpopularityovertheyearsistobecome

apubliccompanythroughaninitialpublicoffering(IPO).ByengaginginanIPO,

a firm becomes available to invest in by the public,which enables the firm to

obtainalargeamountofcapitalandenablefastergrowthorexpansion.

AwidelystudiedIPOthathappenedrecentlyistheIPOofAlibabainSeptember

2014, which broke the record of having the largest IPO in the world. Alibaba

managed to sell 368 million shares on the New York Stock Exchange, which

enabledthefirmtoraise$25billion(Forbes,2014).However,lookingatAlibaba

oneyear after its IPO, theperformance isnot as great as its IPO.According to

Reuters (2015), the stock-price of Alibaba has declined nearly 30% since its

launchontheNYSE.AlibabatooktherecordofthelargestIPOinthewordfrom

theAgriculturalBankofChina(ABC),whichraised$22,1billionwhenitentered

theHongKongStockExchangein2010.Afterasteadyincreaseofthestock-price

in thethreeyearsafter IPO,2015sawasignificantdecrease in thestock-price.

ThesetwoexamplesofIPOsillustratethemagnitudeofIPOsandthefactthata

successfulIPOdoesnotguaranteeasuccessfulperformanceaftertheIPO.

TheliteratureregardingIPOsandthepost-IPOperformanceisratherextensive.

However, the vast majority of researchers focus on one country and identify

whatfactorsinfluencetheperformanceofpublicfirmsaftertheIPO.Tothebest

of my knowledge, this is the first paper that directly compares the post-IPO

performanceintheUnitedStatesandChina.Theprimaryaimofthispaperisto

analysethedifferencesbetweentheperformanceofpublicfirmsafterlistingon

themainstockexchangesof theUSand themainstockexchangesofChina.By

analysing the three-year post-IPO performance, I look for the differences and

causes that explain the differences between the IPO markets, and see where

thesedifferencescomefrom.

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Thefirstreasonwhycomparingthesetwocountriesisinterestingandrelevant,

is because they are the number one and two economies of the world.

Furthermore, whereas the US has been the frontrunner of economic

development,Chinaisstillconsideredbeingadevelopingcountry,experiencing

largegrowthssincetheestablishmentsoftheirIPOmarket.Therefore,analysing

the differences between the two different types of economies might provide

more insightsonhow these typesofeconomies influence the IPOmarketsand

theperformanceoffirmsthatenterthesemarkets.

ThemostfamouscountrytoperformanIPOistheUnitedStates,withtheNew

YorkStockExchangeandtheNASDAQasitsmainstockexchanges.In2014,the

USreachedanewhighregardingnewissuessince2001with273offeringsthat

totalledanaggregateof$85billion(BusinessInsiderUK,2015).However,partof

this new high is the IPO of Alibaba, which realized an offering of $25 billion,

which significantly inflated the average IPOproceeds.When comparing this to

theChineseIPOsin2014,wenoticethefollowing:GreaterChinastockexchanges

268 IPOs, with total funds raised of $43,4 billion. Even though the amount of

IPOs in China is almost equal to the amount of IPOs launched in the US, the

amount thatwasraisedby these IPOsdiffersignificantly.Evenaftercorrecting

forAlibaba’smassiveIPO,theUSIPOstendtoraisesubstantiallymorefundsas

comparedtoChina.

Thepointoffocusinthispaperistocomparethelong-termperformanceofthe

firmsaftertheIPOintheUSandChina.Morespecifically,Iwilllookwhetherthe

economic factors, i.e. the involvement of venture capital and underpricing and

firm-specific characteristics, such as firm industry and age of the firm. The

results of this paper indicate that the US IPO firms outperform the firms that

launchedtheirIPOinChina.

Therestofthispaperisstructuredasfollows:Sectiontwoprovidesaliterature

review covering the ideas and conclusions of existing literature regarding the

IPOmarketsandpost-ipoperformance.Section3willdiscuss thedataand the

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methodologyusedfortheanalysis.Section4willdisplaytheresultsandsection

5willconclude.

2.LiteratureReview

2.1.Long-termunderperformance

The post-IPO performance of firms is an extensively researched topic. Many

academicshavepointedoutthatthestockperformanceoffirmsdeclineasaafter

theIPO(Khurshedetal.,1993,Rudd,1993,Ritter,2007).Thisdecreaseinstock

performance is denoted as the long-term underperformance. Several

explanations for this finding exist,which, according to Khurshed et al. (1999),

canbeplacedintothreegroups.

The first group they identify is basedonbehavioural factors and expectations.

Onehypothesisthatbelongstothisgroupisthepricesupporthypothesis,which

statesthatunderwriterskeeptheinitialtradingpricesartificiallyhightocreatea

favourable situation for the underwriter (Rudd (1993). However, once the

underwritersdistantiatefromtheIPOfirm,thepriceswilladjustdownwardsto

reflect the truemarket value. Another often-discussed factor, belonging to the

firstgroup,isthebehaviouralhot-marketview.Thisviewstatesthatfirmstend

togopublic in favourable times.By listingonanexchangewhen themarket is

reacting (over) enthusiastic on the firm will drive the IPO price upwards.

However, as market conditions return to a normal level, the performance of

firms will be lower than the initial expected growth. (Ritter, 2007). This is

amplifiedbytheinformationasymmetryhypothesis,whichstatesthatinvestors

initiallyoverpayforthestocksbutthattheexpectedlong-termreturnsdecrease

asmoreinformationbecomesavailabletotheinvestors.Consequently,thestock

price decreases with the decrease in initial investor sentiment (Rayan and

Servaes,1991).

The second group is based on the agency cost hypothesis,which roots can be

found in the theory of Jensen enMeckling (1976). The theory proposes issues

thatarisewhenownershipandmanagementofacompanyarebeingseparated.

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Management’s reduction in equity stake and degree of monitoring results in

suboptimalperformance.ThisisinlinewithMikkelsonetal.(1997),whofound

thatthegreatestreductioninoperatingperformancehappenedinfirmsinwhich

management equity stake reductionwas also the highest. In other words, the

higher the retained equity-stake of management, the lower the

underperformance.

The third and last group explains under-performance as amis-measurement,

which consists of two factors. Firstly, the measurement of long-term

performanceissubjecttothechosenbenchmark.Animperfectbenchmarkmay

cause theresults toshowunderperformancewhileamoresuitablebenchmark

mayexistthatwouldsuggestotherwise(FamaandFrench,1996).Forexample,

Brav et al (1998) show that IPO firms perform similarly to non-issuing firms

when they are matched on the basis of firm size and book-to market ratios.

Secondly,unrelatedtothefirstpoint,mis-measurementmayrefertothefailure

tocontrolproperlyforriskorissueswithmeasuringperformanceoveralonger

period.

The next section will provide an overview of the current literature on the

institutional differences between theUS andChina regarding the IPOmarkets.

Even though thiswillnotbepartof theempirical sectionof thepaper, itdoes

provide important informationregarding thesettings inwhich these IPOs take

placeandwhateffectthismayhaveontheperformanceoftheIPOfirms.

2.2.InstitutionaldifferencesbetweentheUSandChina.

TheIPOmarketintheUnitedStateswasthemostactivein2014regardingnew

issues since 2000 (Skadden, 2015). Especially since the recovery from the

financialcrisisin2010,moreandmorefirmshaveexercisedanIPO,with2014

having the most issues with 275 offerings that totalled an aggregate of $55

billion.AccordingtoSkadden,theincreaseinnewissueswasmainlycausedbya

strongmergerandacquisitionmarketandpositive,favourablevaluationsonthe

stockmarkets.ThelargestincreaseinIPOsintheUSoverthelastyearsiscaused

by the healthcare and technology sector (Skadden, 2015). The US IPOmarket

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and theUSeconomy ingeneralhavebeenamong the frontrunners in termsof

development and consequently theUS is currently having a strong and rather

stable economy. Moreover, along with the developed economy, also the

institutionalenvironment in theUS is stable, resulting inminimalpolitical and

institutionalrisksinvolvedwithdoinganIPOaswellasinvestinginIPOs.

The Chinese IPO market, on the other hand, is rather different from the IPO

market in the United States. Regarding the development, China is still an

emerging market, which is illustrated by the fact that the Shanghai Stock

Exchangewasestablishedin1990,asopposedtotheNewYorkStockExchange,

whichlaunchedover200yearsago.Moreover,thegovernmentplaysalargerole

in the processes regarding the IPO market (Chan et al, 2004). The Chinese

governmentmaintainsashare issuequota,whichdetermines thevalueofnew

shares,sincethisispartofthenationalinvestmentandcreditplan,withthegoal

of supporting the regional or industrial development goals and keeping the

balance among industries.Consequently, the Chinese officials have significant

power regarding whether or not to allow a firm to perform an IPO in China

(Chanetal,2004).Othercharacteristicsof theChinesestock-exchangethatare

unique in comparison to mature markets is the fact that Chinese officials,

throughtheCSRC(ChinaSecuritiesRegulatoryCommision,determinetheoffer

pricefortheIPOs,whichisusuallydoneweeksbeforethefirmgoespublic,with

commonlynospaceforfeedbackwithregardstoadaptingtheofferprice(Suand

Fleisher,1999).Asa resultof these featuresof theChinese IPOmarkets, firms

facesignificantuncertaintywhenapplyingforanIPO.

Aside from the influence of the Chinese government, the Chinese market is

subjecttoseverecorruption.NoteworthyisthefactthatinNovember13th,2015,

YaoGang,vicepresidentatChinaSecuritiesRegulatoryCommission(CSRC),has

beenarrestedoncorruptionprobe(Forbes,2015).YaoGanghas thenickname

Kingof IPOsasheoversawthe issuanceof IPOsofA-shares for thirteenyears.

Even though thiseventhappenedat theendof2015end therefore isafter the

sample period used in this paper, it still visualizes the level of corruption and

politicalriskthatisinvolvedintheeconomyofChina.Thisobviouslyhasalarge

impactonseveralaspectsthatoccuraroundtheIPO.Firstly,theexpectationsof

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investorswillbe loweredsince thepolitical riskwillputpressureon thestock

price. Secondly, investors will demand higher rates or return on their

investments.

Additionally,inChinathereisasubstantialamountofformerstate-ownedfirms

that have been taken public through an IPO. However, since it is common for

suchfirmsthatthestateisstillinvolvedaftertheIPO,itisquestionablewhether

thereactionofthemarketandtheperformanceofthefirmissimilartonormal

firms going public. Fan et al. (2014) find evidence of a negative relationship

betweenpoliticallyconnectedCEOsontheperformanceofChinesefirmsafteran

IPO. They state that those firms tend to have boards consisting of multiple

current or former government bureaucrats. These boards show significantly

lowerdegreesofprofessionalismasopposedtoboardsconsistingofpeoplethat

areselectedmerelyontheirprofessionalcompetencies.Furthermore,Fanetal.

mention that these board compositions or politically connected CEOs tend to

have alterative agendas that are not align with the organizational goals. As a

result of this unprofessionalism, the authors find that these firms have lower

operatingandstock-returnperformancethanfirmswithoutthe involvementof

politicallyconnectedindividuals.

Thenextsectionprovidesanoverviewoftheliteratureregardingmarketfactors

thatmay influence the long-term performance of IPO firms. These factors are

alsothefocusoftheempiricalsectionofthispaper.

2.3.DifferencesinmarketmechanismsbetweentheUSandChina

2.3.1.VentureCapital

A phenomenon that has obtained increased attention in recent literature is

venture capital. Venture capitalists are firms that invest capital in other firms,

mainly start-ups and young and small firms, in order to enable these firms to

operateonalargerscaleinturnforashareoftheprofits.AccordingtoCumming

andMacIntosh(2003),inpartialexits,averageannualratesofreturnstoVCare

84% in IPOs as opposed to only 20% in acquisitions. Even though their data

stemsfromoveradecadeago,itvisualisestheappealofVCsandtheimpactthey

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haveonthepost-IPOperformanceoffirmsthatwentpublic.Theriseinventure

capitalhascomealongwiththeincreaseinnewfirmsandInternetstart-ups.The

onlinedevelopmentandpossibilitieshavecreatedaglobalizedmarket.Oneidea

is all that is needed in order to reach thewholeworldwith a newproduct or

service. Think of Facebook, created by one teenagerwhomanaged to create a

multibillioncompanywithinacoupleofyears.Asaresultofthesemodern-day

possibilities, investment firms are eager to keep an eye open and to find such

gems. Consequently, the subject of venture capital is nowmore relevant then

ever.

TheliteratureregardingtheinvolvementofventurecapitalintheIPOprocessis

positive,implyingthatbeingbackedbyVentureCapitalisbeneficialintermsof

improved long-term performance. Krishnan et al (2009) wrote an extensive

paperdiscussingtherelationshipbetweenventurecapitalandtheorganizational

structureandperformanceofanIPO-firm.Theyfindthat firmsthatarebacked

by venture capital outperform their non-VC backed counter parts. Moreover,

they find thataventurecapitalist’s reputation isalsoan importantaspect.One

reasonforthisisthatreputableventurecapitaliststendtoselectmoreefficient

companiestoinvestin.However,alsowhencontrollingforthisselectivity,they

find that pre and post-ipo performance of firmswithmore reputable venture

capitalists backing them significantly outperforms firms that are backed with

less reputable venture capitalists. Krishnan et al. (2009) find that more

reputableVCsmorefrequentlyretaintheirsharesandboardseats,evenafterthe

IPOlock-upperiod(lastingusually180days).Thismorethoroughandlong-term

guidanceleadstomoreeffectivenessandhigherperformance.

ThefindingofapositiverelationshipisinlinewithearlierworkofKiniandPain

(1995),whoalsoconcludethatventurecapitalhasasignificantlypositiveeffect

onlong-termperformance.Furthermore,theyfoundthatventurecapitalsignals

qualitytoinvestors,whichincreasesthepossiblefundsthatcanbeobtainedby

performing an IPO. Moreover, they find that the post-IPO performance of VC-

backed firms is superior since venture capitalists provide efficientmonitoring

mechanisms, which especially in young and risky firms tend to prove very

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beneficial. However, venture capitalists tend to lower their stake in the firms

whenthefirmsareperformingsteady,whichtheyfindtobeafteracoupleyears.

Consequently, the performance levels of VC-backed and non-VC-backed firms

tendtoconverge towardsasimilar levelafter the IPO-period.This isamplified

by the investors who react to the disappearance of the venture capitalists,

therebyevenfurtherconvergingtonon-VClevels.

2.3.2. IPOunderpricing

Theunderpricingandlong-termperformanceofIPOsarecommonlyreferredto

asthetwoanomaliesofIPOS,sincetheyarethetwomostextensivelyresearched

aspectsofIPOs.IPOunderpricingisthephenomenonofalargepositivegaintoa

newissueafterthefirstdayoftradingrelativetotheofferprice.

However,thereishardlyanyresearch,whichexaminestherelationshipbetween

underpricingandlong-termperformance.LeeandHovey(2009),however, find

that higher initial IPO returns on day 1 in China are valued more highly by

investorsandprovidesuperiorearningsandreturns in the long-run.They find

thesameresultsfortheday-tenreturnsandtheday-21returns.Moreover,since

underpricing measures the return on the first day, it is part of the long-term

performance of the IPO firm. Consequently, there should be a high correlation

betweenunderpricingandlong-termperformance.

2.3.3.Technologyfirmsandfirmage

The literature on the effects of firm industry and firm age is rather extensive.

However,inrelationtoIPOs,therearenotmanypapersthatprovidesignificant

informationonitseffectsonpost-IPOperformance.XiongandBharadwaj(2011)

stresstheimportanceoftheabsorptivecapacityofyoungtech-firms,statingthat

theflexibilitythatsuchfirmstendtohaveovernon-technologyfirmscanprovide

foracompetitiveadvantagethatcanhelptechfirmstomoreeasilycopewiththe

transitioningfromaprivatefirmtowardsapublicfirm.

On the other hand, however, investors may be reluctant to take the risk of

investing in a younger firm, since such firms mostly still have to prove

themselves (Fazli, 2015). Fazli also states that this effect is beingmitigatedby

the level of internationalisation. Being active in multiple countries can partly

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offset thedisadvantageofbeingyoungwithregards to investorswillingness to

invest. Investors tend to see being active in multiple countries as a positive

signal, and as a safer choice then a young firm that solely operates in one

country.

3.DataandMethodology3.1.Data

Concerningthedata,IdecidedtoincorporateIPOsoftheNYSEandNASDAQin

theUSandtheShanghaiStockExchangeandtheHongKongStockExchangein

China. I choose these stock-exchanges, since they are the two largest stock-

exchangesintheircountry.Afterselectingthesestockexchangesinthedatabase

of Bureau vanDijk, for the period 2007-2012, I obtained a sample for 107US

IPOsand84Chinese IPOs.Reason for taking2012as the lastyear is toable to

calculate thestockperformanceof these IPOs for the threeyearsafter the IPO

date.However,afterobtainingalladditionaldataneededformyanalysis,Ihadto

reduce my sample size to 87 US IPOs and 53 Chinese IPOs after deleting

observationswithmissingdata.

3.2.Variables

3.2.1.Dependentvariable

The dependent variable ofmy research is the long-term performance of IPOs,

whichismeasuredasfollows,asoriginallydevelopedbyRitter(1997):

1 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 ≡𝑃3 − 𝑃𝑜𝑃𝑜

WherePtistheadjustedstockpriceafterthreeyears,andPo istheofferpriceof

theshare.Inthesamefashion,Ihaveobtainedthepost-IPOperformanceatthe

1,2and3-yearmark.Forthefirstyearperformance,Pt istheaveragefirstyear

adjustedstock-priceandPo isalsotheofferprice,whichisshownbelow:

(2)𝐹𝑖𝑟𝑠𝑡 𝑌𝑒𝑎𝑟 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 ≡ !1!!𝑜!𝑜

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For the second year performance,P2 is the average adjusted stockprice of the

secondyearandP1 istheaveragestockperformanceofthefirstyear:

(3)𝑆𝑒𝑐𝑜𝑛𝑑 𝑌𝑒𝑎𝑟 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 ≡ !2!!1!1

Inthesamefashionasthesecondyear,thethirdyearperformanceiscalculated

bythe followingequation, inwhich𝑃3is theaveragethirdyearadjustedstock-

priceand𝑃2thesecondyearaverageadjusted-stockprice:

(4) 𝑇ℎ𝑖𝑟𝑑 𝑌𝑒𝑎𝑟 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 ≡ !3!!2!2

Note that the stock-pricesusedare theadjustedstock-prices.Thesevaluesare

taken from the database Datastream, and are the stockprices adjusted for

dividendpay-outs.Consequently,thereisnoissuewithfirmsthatpay-outlarge

amountsofdividendsthatwouldimpacttheshare-price,sincethedividendgain

isaddedtothecapitalgain.

In order to correct the results for fluctuations in the market, I created the

variable Market-adjusted Long-term Performance, which will be used in the

regressions.Thisequationisalmostthesameasinequation1,exceptthevalueis

subtractedbythevaluesofthestockexchangeinthesameperiod:

(5) 𝑀𝑎𝑟𝑘𝑒𝑡 − 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 = (!3!!𝑜)!𝑜

− (!3!!0)!0

WheretheMvaluesrepresentthevalueofthestockexchangewherethefirmis

listed. For an IPO that took place on the NYSE,𝑀3is the average value of the

NYSEafterthreeyearsoftheIPO,andM0isthevalueoftheNYSEatdayofthe

IPO.

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3.2.2.Independentvariables

Firstindependentvariableistheventurecapital,whichisadummyvariablethat

hasavalueof1incaseofafirmthatisbackedbyVCandavalueof0incasethat

no venture capital is involved. Since this information could not be found in

existingdatabases,Ifoundthisinformationbythoroughlygoingthroughreports

oftheIPOfirms.

Underpricingiscalculatedsimilarlytothelong-termperformance,namelybythe

followingequation:

6 𝑀𝑎𝑟𝑘𝑒𝑡 − 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑢𝑛𝑑𝑒𝑟 − 𝑝𝑟𝑖𝑐𝑖𝑛𝑔 = (!𝑡!!𝑜)!𝑜

− (!1!!0)!0

WherePtisthetradingpriceattheendofthefirstdayoftradingandP0isthe

offerpriceoftheshare.M1isthevalueofthestockmarket indexattheendof

thefirstdayoftradingoftheIPOstock,andM0isthevalueofthestockmarket

indexatthebeginningofthefirstdayoftradingofthenewstock.Consequently,

similarly to the calculation of the market-adjusted long-term post-IPO

performance,theamountofunderpricingisalsocorrectedforthecorresponding

stock exchange. Underpricing of IPOs in the US are corrected for market

fluctuations using the NASDAQ and the NYSE and underpricing in China is

corrected bymeans of the Shanghai Stock Exchange and theHong-Kong stock

exchange.

Another independent variable is technology, which, similar to venture capital,

hasavalueof1 incaseofa tech-firmandavalueof0 if the firmoperates ina

different industry. Finally, a country dummy is included in the final equation,

whichhasavalueof0whentheIPOtookplaceintheUnitedStatesand1ifthe

IPOtookplaceinChina.

Fromallthevariablesdiscussedaboveandtheinclusionofthecountrydummy,I

obtainedthefollowingregressionequation:

(7) 𝑀𝐴. 𝐿𝑇𝑃 = 𝛽0 + 𝛽1𝐶𝑂𝑈𝑁𝑇𝑅𝑌 + 𝛽2𝑉𝐶 + 𝛽3𝑈𝑃 + 𝛽4𝑇𝐸𝐶𝐻 + 𝛽5𝐴𝐺𝐸 + ℯ

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WhereMA.LTPisthedependentvariable,representingthemarket-adjusted

long-termperformance.COUNTRYrepresentsthedummyvariablewhich

indicateswhethertheIPOtookplaceintheUSorinChina.UPrepresentstheIPO

underpricing.TECHrepresentsadummy,whichindicateswhetherthefirm

operatesinthetechnologysectororanothersector.Lastly,AGErepresentsthe

ageofthefirmwhenlaunchingtheIPO.

Thisequationwillbeusedinsection4,whereIwillprovidemyanalysisand

showtheresultsitcreated.Thenextpartwillprovidethedescriptivestatisticsof

myindependentvariables.

3.3.Descriptivestatistics

Table 1 below shows the descriptive statistics of the independent variables,

consistingoftwopanels.PanelAshowsthevariablesfortheUSIPOsandPanelB

showsthevariablesfortheChineseIPOs.

Table 1 Descriptive statistics of independent variables

The table shows that in the United States, more than half of the firms that

launchedanIPOdidsowiththehelpofatleastoneventurecapitalist.China,on

Variable Mean Median Standard Deviation Minimum Maximum Observations

Panel A: US (n=84) Venture Capital 0,61 1 0,49 0 1 84

Underpricing 0,15 0,05 0,24 -0,20 0,98 84 Technology 0,43 0 0,50 0 1 84

Age until IPO 7,14 5 10.44 0 72 84

Panel B: China (n=52)

Venture Capital 0,25 0 0,44 0 1 52 Underpricing 0.24 0.11 0.38 -0,27 1,66 52 Technology 0,12 0 0.32 0 1 52

AGE 9,37 6 14,64 0 98 52

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the other hand, only 25% of the firms in the sample was backed by venture

capitalatthetimeoftheIPO.Thisisinlinewiththetheory,whichsuggeststhat

venture capitalists aremore careful in China with regards to the institutional

risksthatarepresentintheChineseIPOmarket.Further,IPOunderpricingison

average15%intheUS,asopposedto24%inChina.Thisisalsoinlinewiththe

current literature, which states that underpricing is more severe in emerging

markets than it is inmaturemarkets. Furthermore, theUS subsample consists

for43%of firms that are operating in the technology sector. Compared to the

12%ofthefirmsinChinathatoperateinthetechnologysector,itshowsthata

significantlyhigheramountofthefirmsthatgopublicintheUSisworkinginthe

technology sector. Moreover, these tech-firms tend to be younger when

launching an IPO, which may explain the age difference between the US and

China.WhereastheaverageagebeforetheIPOintheUSissevenyears,itisover

nineyearsinChina.

4.Results4.1.UnivariateanalysisofPost-IPOperformanceintheUSandChina

Table2

Univariate analysis comparing long-term performance of the US and China

PanelA:US PanelB:China Difference TstatisticLong-Term(3years)Performance 18,78% -5,82% 24,60% -2,7874(0,0471**)Market-Adjustedperformance 14,66% 0,91% 13,75% 1,5388(0,1262)Numberofobservations 84 53

First-YearPerformance 21,10% 7,11% 13,99% 1,3651(0,1745)Market-AdjustedPerformance 18,51% 7,37% 11,14% 1,1105(0,2688)Numberofobservations 84 53

Second-YearPerformance 2,65% -17,13% 19,78% -2,4873(0,0141**)Market-AdjustedPerformance -0,45% -6,49% 6,04% -0,8878(0,3762)Numberofobservations 84 53

Third-YearPerformance 12,21% 9,79% 2,42% -0,3483(0,7282)Market-AdjustedPerformance -2,11% 4,49% -6.6% 1,0185(0,3103)Numberofobservations 84 53

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Table2 shows the averagepost-IPOperformanceof theUS andChinese firms.

WhatstandsoutisthesuperiorstockperformanceoftheUSfirmsasopposedto

theChinesefirms.WhereasthestockperformanceoftheUSfirmsincreasedwith

18,78%afterthreeyears,theChinesefirmsobtainedadecreaseinperformance

of5,82%.Thisdifferenceisstatisticallysignificantatthe5%level,asshownby

thep-valueof0,0471.However,whenadjustingthesevaluesformovements in

thecorrespondingstockexchanges, theUSPerformance increase is lowerwith

13,66% and the Chinese performance decrease is replaced with a small

performance increaseof0,91%.However, thep-valueof this finding is0,1262,

thereforelackingstatisticalsignificance.Asameansofcheckingforrobustness,I

havewinsorized the long-termperformance at the2% level.Regarding theUS

long-term performance, the results are rather similar to the results found in

table2,withamarket-adjustedperformance increaseof13,87%in theUS.For

China however, winsorizing at the 2% level causes the market-adjusted long-

termperformancetodropto-0,62%,thereforeindicatingamarginaldecreasein

performance. However, the corresponding p-valuewith this equality ofmeans

testis0,1346,lackingstatisticalsignificance.

Whenlookingattheindividualyears,itstandsoutthatthereisalargeamountof

variation.The firstyearafter the IPOshowsrather largevaluesof21,10%and

7,11% for the US and China respectively, indicating that IPO firms in both

countriestendtoperformbetterinthefirstyear,thantheydoonaverageforthe

threeyearsaftertheIPO.However,whenlookingatthesecondyear,theresults

showthatbothcountriestendtoperformweakerinthesecondyearcompared

tothefirstyearaftertheIPO.RegardingtheUS,IPOsobtainonlyanincreasein

performance of 2,65%, after 21,10% in the first year. Simultaneously, The

ChineseIPOperformanceinthesecondyeardroppedwith17,13%,asopposed

toanincreaseof7,11%inthefirstyear.However,whenadjustedforthestock

markets, thesevaluesare -0,45%and-6,49%in theUSandChinarespectively,

indicating underperformance in theUS aswell as China. Lastly, the third year

shows an increase in performance for both countries. Yet,when corrected for

movementsinthestockexchanges,thevaluesshow-2,11%and4,49%intheUS

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and China respectively, meaning that where the performance of US firms

decreased in the thirdyear, theperformanceofChinese IPO firms increased in

relationtothesecondyear,whencorrectedformarketmovements.

The next section provides themultivariate analysis showing the effects of the

independent variables on the dependent variable Market-adjusted Long-term

Performance, allowing to see whether (part of) the results of table 2 can be

explained by the presence of venture capital, the level of underpricing, the

technologyindustryortheageofthefirmatthepointoftheIPO.

4.2.MultivariateanalysisofPost-IPOperformanceintheUSandChina

Table 3 shows the OLS regression of the dependent variable Market-adjusted

Long-termPerformance.Forthisregression,acountrydummyisincludedwhich

allowsfortakingthefullsampleintotheregressionandtoseethecountryeffect.

Table 3 Multivariate analysis of Post-IPO Performance in the US and China

Independent variable Coefficient Country -0,2725 (0,0436**)

Venture Capital 0.0866 (0,4982 Underpricing 0,4801 (0,0159**) Technology -0.2261 (0,0991*)

AGE 0.0020 (0,6834) -

Table 3 shows the relationships between the independent variables and the

dependentvariableforthewholesample,includingChineseaswellUSIPOs.The

main variable, the country dummy variable, shows a statistically significant

coefficient of -0,2725, indicating that the US IPOs show significantly higher

performanceasopposedtotheirChinesecounterparts.Furthermore,theresults

show that venture capital has a coefficient of 0,0866,which is rather low and

statistically insignificant. Consequently, this finding is not in linewith existing

literature, which claims that the involvement of venture capital significantly

improves the performance of the IPO firm. Furthermore, the independent

variable Underpricing shows a coefficient of 0,4801, which is statistically

significant at the5% levelwith a p-value of 0,0159.This result is no surprise,

sinceunderpricingiscalculatedastheincreaseinstock-priceonthedayofthe

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launch. A high underpricingwould therefore cause higher values of long-term

performance, since long-term performance is also measured against the offer

priceoftheIPO.Accordingtothetable,beingactiveinthetechnologysectorhas

anegativeeffectonthe long-termperformance.Thisobservationis interesting,

sincetech-firmstendtobesubjecttolargerriskthannon-technologyfirmsand

largerriskisusedtobeassociatedwithhigherreturns,i.e.higherperformance.

Lastly, Age is found to have practically no influence on the long-term

performanceofanIPOfirm.

Table4belowshowstheresultsoftheregressionstheUSandChinaindividually,

in order to assess the impacts of the independent variables on each country

independently of each other. Note that at first the independent variable

underpricingisnottakenintoconsideration,yet it ispartofthesecondpartof

thetable.

Table 4 Multivariate analysis of market-adjusted Post-IPO Performance in the US and China individually with and without underpricing.

Independent variable Panel A: US (N=84) Panel B: China (N=53)

Venture Capital 0,1619 (0,3920) -0,0033(0,9813) Technology -0,2031 (0,2762) -0,3552(0,0722*)

Age 0,0015 (0,8547) 0,0001(0,8173)

Including underpricing Venture Capital 0,1238 (0,5187) 0,0209(0,8736)

Technology -0,2219 (0,2359) -0,2538(0,1633) Age 0,0015 (0,8583) 0,0023(0,5572) Underpricing 0,4253(0,2733) 0,4964(0,0021***)

Table 4 shows the OLS regression of the dependent variable Market-adjusted

long-term performance for the US and China independently. The table shows

that theeffectsof the independentvariableson themarket-adjusted long-term

performance are rather similar. The table shows that with regards to the US,

venturecapitalhasacoefficientof0,1619,indicatingthatventurecapitalseems

tosubstantiallyinfluencethelong-termperformanceofIPOfirmsintheUS.This

is in linewith the theory,which states that venture capital ismore frequently

presentinmaturemarketsandalsoobtainhigherresultsinsuchmarkets.Inthe

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Chinese subsample, the table shows that venture capital has practically no

impactonthepost-IPOperformanceoffirmsinChina.

The results regarding tech-firms show a negative relationship with post-IPO

performanceforboththeUSaswellasforChina,withavalueof-0,2031and-

0,3552, the latteronebeingstatisticallysignificantatthe10%level.Firmsthat

are active in the technology industry have lower performance, comparedwith

firmsthatarenotactiveinthisindustry.

5.Conclusion,limitationsandrecommendationsThis paper analyses the differences and similarities between the post-IPO

performanceintheUnitedStatesandChina.Ifindthatbothcountriesonaverage

obtain positive long-term returns, with the US having a value of 13,66% and

China a value of 0.91%, which is inconsistent with the theory of post-IPO

underperformance, which states that firms tend to see a decrease in their

performanceafterenteringinanIPO.EventhoughIfindapositiverelationship

withthepresenceofventurecapitalandlong-termpost-IPOperformance,these

results are statistically insignificant. I find, however, a negative relationship

between being active in the technology sector and long-term post-IPO

performance,whichisstatisticallysignificantfortheChineseIPOmarket.

Thispaperhasseverallimitations.Firstandforemostistherathersmallsample

size,whichdisabledme fromobtainingmultiple statistically significant results.

EspeciallyregardingtheChinesesubsample,itisratherdifficulttogeneralizethe

findings since I only have a Chinese sample of 50. Furthermore, the wide

variation in the sample alsomakes it difficult to obtain solid results, since the

very successful IPO firms offset very unsuccessful IPO firms. Yet, because the

obtained sample is so small, there is a large selection bias that significantly

impacts theoutcomeof the regressionanalysis.Another issue that I facedwas

thelimitedventurecapitalthatispresentinChina.WhereintheUSalmost50%

of the firmsarebackedbyventurecapital, inChinaonlyasmallportionof the

firmsthatgopublicdosowiththehelpofventurecapitalists.Anotherlimitation

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ofthispaperisthatIwasonlyabletocorrectforchangesinthestockexchanges.

Due to time constraints, itwas impossible to correct against similar firms that

didnotopt for an IPO.This resultwould, however, enable the results tomore

broadlyapplicable.Comparing theperformanceof IPO firmswithsimilar firms

whichdidnotoptforanIPO,wouldprovideamoreclearerinsightintowhether

ornotperforminganIPOwouldcreatebenefitsasopposedtostayingaprivate

firm. Further, a limitation of this paper is the sole empirical focus onmarket

factorsand firmcharacteristics.However, asmentioned in the literature, there

arealsolargeinstitutionaldifferencesbetweentheUSandChina,alargeimpact

beingthepresenceofcorruptioninChina.

This paper contributes to existing literature by providing some theoretical

aspects that distinguishes the IPO market of the US from that of China.

Unfortunatelymyempirical analysis, though it indicated thepositive impactof

venture capital on long-term performance, could not statistically significantly

supportthehypotheses,duetothesamplesizethatisnotlargeenough.

Futureresearchcancontinueonthispathbyanalysingthedifferencesbetween

the established US market and the still emerging Chinese market, that is

developingratherquickly.Yetitwillbeadvisedtoincorporatemorefirmsinthe

sample in order tomake subsample comparisons and to be able to effectively

generalize the findings. Moreover, as mentioned before, matching the

observationswithfirmsthatdidchoosenottobecomeapublicfirmwillshinea

more clearer light on the phenomenon of long-term underperformance.

Researchmayalsoshinemore lightonthe impactofcorruption in theChinese

stock-market,and identify the influencesthishason investorsandonpost-IPO

performance.Lastly,futureresearchcanalsopaymoreattentiontotheChinese

stock-market,since ithasbeenundergoingmajorchangesafter the time-frame

of thispaper.Forexample,2015showed thatChina’seconomymightnothave

beeninsuchalargegrowthaswaspreviouslyanticipated,whichputpressureon

thewholecountryaswellasinternationally.Consequently,theresultsonIPOsin

ChinaandthecomparisonwiththeUnitedStateswillremaintobeaninteresting

fieldofresearch.

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