Delaying initial public offerings when companies are ready to go public can cause significant financial losses, and the effects can last for years, according to Chicago Booth’s Lin William Cong, New York University’s Sabrina T. Howell, and Peking University’s Ran Zhang.
The researchers analyzed five IPOs that were temporarily blocked by Chinese regulators. While China’s economic institutions are unique, its stock markets serve the same purpose as those elsewhere—financing new projects and creating liquidity. China’s two major exchanges, in Shanghai and Shenzhen, list nearly 3,000 companies. In 2016, there were 103 IPOs on the Shanghai exchange and 46 in Shenzhen, compared with 128 in the United States.
To win approval for an IPO in China, a company hires investment bankers and accountants that help with corporate restructuring for an application to the China Securities Regulatory Commission. The process can take more than three years. The CSRC, which occasionally suspends IPOs out of concern that an influx could reduce liquidity and hurt the market, took this action nine times from 1994 through 2015. Cong, Howell, and Zhang were able to obtain data to analyze five.
The researchers examined the effects the suspensions had on the companies’ performance and value creation, including on the number of patent applications the companies put up, their capital expenditures, and their stock price movements. They find that suspensions reduced patent applications during the delays and for years after the companies were finally listed. Each extra month of delay in an IPO reduced a company’s patent applications by about 10 percent and decreased by 1.5 percent the amount a company invested in its plant and equipment.
Once a suspension was lifted and a company went public, the effect on patenting persisted, indicating that the delay was effectively a disruption that, in addition to affecting a company’s access to capital, had a long-term, cumulative effect on its development and financing activities. The share price was also more volatile than that of other stocks, indicating that an IPO delay also reduced a company’s relative growth value. “The results suggest that by increasing uncertainty and reducing access to capital, disruptions to the IPO process chill value creation, especially innovation,” the researchers write.