Innovation and Initial Public Offerings (IPOs): evidence from China

The purpose of the current study is to examine the impact of innovation information in the pre-IPO period on the Initial Public Offering (IPO) anomalies in the Chinese equity and product markets during the 2009−2016 period. This thesis constructs two indices to measure the dimensions of innovation input (R&D spending) and innovation outcome (patents) for this purpose. Three studies of the thesis respectively examine the impact of innovation of the initial public offering on the short-term performance of IPO companies, on the long-term performance IPO companies, and on the post-IPO product market feedback performance of firms. The period under the research coincides with the changes in the Chinese industrial policy that had profound impacts on the outcome of the study. Accordingly, research includes detailed analysis of government policies and how they affected the results of our investigation. The first study focuses on the relationship between pre-IPO innovations and IPO short-term performance in the Chinese A-share market during the 2009−2016 period. Our investigation includes the extent of IPO underpricing during 2009−2014, and a new form of IPO underpricing that emerged after 2014, named "honeymoon period," caused by changes in the reformation of the Chinese IPO market. Findings suggest that the innovation input (R&D spending) generates information asymmetry and valuation uncertainty in the market, causing shares to be more prone to IPO underpricing in the capital market. However, for the innovation outcome in the form of patents, there exists a positive signal effect, which can significantly reduce the underpricing. In addition, the Chinese industrial policy has exaggerated the positive effects of innovation input and the negative effects of innovation outcome on the IPO short-term performance of firms before 2014. These findings suggest that China needs to improve its macroeconomic environment in order to promote its industrial policy in the IPO market more efficiently. In the second study, we extend the previous research to investigate the impact of firms' pre-IPO innovation capital on the long-term performance of firms in the post-IPO period. This study applies Fama-French five-factor model to classify firms according to the different levels of innovation. The second part of this study also examines the impact of innovation on the IPO long-term performance by applying the OLS regression. From the perspective of innovation outcome, the number of patents has a positive impact on the post-IPO stock performance of firms. In contrast, the level of innovation input has a negative impact on the long-term performance of IPOs. Findings suggest that valuation and pricing of the two types of innovative capital significantly affect the long-term performance of firms in the IPO market. Finally, the third study examines the role of firms' innovations in the product market and the feedback performance that firms receive through their daily operations, industry competition, and enterprise strategy in the post-IPO product market. The first part of this study utilizes the sales, profits, and capital expenditure as the proxies for the operating performance of firms in their post-IPO period to examine the impact of innovation capital on these variables in the product market. The second part investigates whether firms that have gone public in periods of higher industry innovations have become more competitive in the product market. The results show that the extent of innovation would have a significant effect on the going-public decision by firms to fund their future investments and enhance their competitive position in the product market. Findings also suggest that firms with high levels of innovation would have better productivity and investment opportunities. Further, innovation can stimulate the firms' public finance for future investments, and thus improve their competitive position in the post-IPO periods.