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JEL Classification System

D72, D80

Abstract

This study aims to analyze all the Chinese Initial Public Offerings (IPOs) during 2010–2014 and follow their performance for five years. The study particularly tests the competing hypotheses on the role of Chinese private equity. The sample includes 916 firms that operate continuously for five years after IPOs to provide additional evidence on long-term performance. The results using the BHARs method indicate that private equity-backed IPOs tend to have significantly higher initial returns than non-PE-backed ones during three years of listing, supporting the screening and monitoring effect hypothesis in China’s capital market. After three years, the market performance of PE-backed IPOs is lower than non-PE-backed IPOs due to the exit of the PE after the lockup period. In contrast, the CAR method has the contrary results. Further analysis finds that the size of the issue, invention patents, company industry area, and hot market index have a significantly stable influence on the stock performance of companies even for five years after IPOs. The implication of the study is that PE firms serve as an effective function of quality screening, which is directly related to the probability of successful exit in the year after the lockup period.

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