When making the comparison between the IPOs of State-Owned-Enterprises and the IPOs of private companies, there exist two most fundamental differences, namely, government regulations and company motivation.
Government regulations and state policies oftentimes result in unequal treatments and unfair advantages for the IPOs of State-Owned-Enterprises. From a historical perspective, the stock market in China arose out of the economic reform of the country, of which the reform of State-Owned-Enterprises was a principle component. The agenda was to partially privatize SOEs by issuing shares to the public while maintaining state ownership, reducing the weight of SOEs in the country’s GDP (Wan and Yuce, 2007). As a product of the SIP, the ownership structure of SOEs has changed. Domestic investor have the right to purchase A shares, while foreign investors have access to purchasing B, H, and N shares (Chen and Shih 2004). Even though to serve and facilitate share issuing privatization was the original function of the stock markets of Shanghai and Shenzhen and state policies have been changing ever since their inception, evidence suggests that government regulations and policies are still more favorable toward SOEs than POEs.
One study finds that, in spite of the fact that the Chinese government abolished the quota system in 2001, POEs still face more scrutinization and higher public listing hurdle (Hung et al 2013). It shows that although China has been transitioning from planned economy to market-based economy, the central government continue to exert a considerable influence on the development of capital markets, allocation of resources, investment decisions, and corporate transparency. Research investigating the IPOs of Chinese companies from 2002-2012 has shown that SOEs with strong political connections have a higher likelihood to list overseas than un-politically connected companies. The primary cause for the difference is that it is easier for SOEs to gain approvals from various government agencies, which subsequently smoothens the path to getting the final overseas listing approval from the CSRC.
For Chinese IPO firms, the government has established listing requirements such as at least 25 percent of floating shares and certain amounts of positive earnings in the years prior to the IPO. What’s more, IPO companies must give details in the IPO application documents on how they are planning to use their newly acquired assets (Liu 2017). However, it is not uncommon for the China Securities Regulatory Commission, otherwise known as the CSRC, to prioritize SOEs over POEs in the line-up for receiving IPO qualification. In certain instances, the CSRC may even loosen the requirements so as to approve a SOE’s IPO application. Furthermore, the CSRC stipulates that companies must hire investment banks to organize the entire IPO process, which includes assessing the fulfillment of conditions required by the CSRC, preparing all IPO documents, and deciding on the number of shares and offer price. This regulation increases both cost and time it takes to get listed, and since SOEs generally have deeper pockets and better resources than POEs, the former gains an upper hand in the IPO process.
In addition to government regulations and policies, there exist different sets of motivating factors between SOEs and POEs for going public. Over the last few years, a surge of Chinese companies have gone public on stock exchanges outside of China, for example the Hong Kong Stock Exchange, the NASDAQ, and the New York Stock Exchange. Having a presence in international capital markets has the potential benefits of gaining access to foreign capital markets and increasing financial returns. Better corporate governance standards of mature stock markets serves as an incentive for Chinese companies to list in overseas stock exchanges. While this is generally true for POEs, it is less so for SOEs. The main differing factor is that high management at SOEs possess the added goal to climb up the political ladder. As executives at big SOEs serve as one of the pipelines for government official positions at the highest level, top managers at SOEs may use IPOs to further their own personal political agenda rather than to purely advance the company’s financial performance.
By looking at government sanctioned news outlet such as the People’s Daily, the Communist Party official newspaper, top executives at overseas-listed SOEs have bigger chances of getting promoted to the Central Government during the five years after the IPO (Piotroski and Zhang 2013). What’s more, the study finds that top executives of overseas-listed SOEs have better chances of being promoted as government officials than their counterparts at domestically-listed companies.
It is not only the political ambitions of SOE executives that incentivize public listings, but those of local politicians as well. By investigating over 400 companies that went public over 20 years since 1998, a study displays that many provincial government heads rely on their political power to expedite the process of IPOs with the aim for political advancement to the Central Government (Wu 2011). In China, the number of IPOs in a province functions as an indicator of economic performance in the eye of the Central Government. As a result, it is in the interest of provincial government heads to encourage more SOEs to opt for IPO. In addition, such political influence extends to POEs as well, albeit differently. As in China it is customarily important for owners of POEs to have good connections with government officials, many POEs may choose to go public right before certain politician transfer to another province. In this way, said government officials earn points on their political resumes, and said POEs gain favors from them (Chi et al 2015).
The differences of government regulations and company motivation between the IPOs of POEs and SOEs lead to significant differences in many aspects of the organization of IPOs, such as long-run performance, the extent of underpricing, and timing of IPO. One study finds that the IPOs of POEs yields noticeably higher long-term returns than those of the SOEs, and that SOEs are more likely to underprice its initial offering (Zhu et al 2013). Another study gives evidence that the post-IPO financial performance of SOEs is worse than that of POEs during the 3-year period following their IPOs on foreign stock markets. As noted in the elaboration on different motivating factors for IPOs between POEs and SOEs, the former usually time their IPOs when the market is doing well so that they achieve a better market valuation; the latter, however, time their IPOs based on important political timelines.
We shall focus more on the impact of aforementioned differences on the timing of IPO. Over the course of 7 years from 2010, the number of IPOs of private companies shows strong correlation with stock market valuation, while the number IPOs of SOEs remain relatively stable with small fluctuations (Lecture PPT p142). This data testifies that market evaluation is not as important to SOEs as it is to POEs when going public. Moreover, researchers have observed that the number of IPOs launched by POEs tend to increase in the wake of the announcements of turnover of local politicians. The rush to file IPOs by private companies has to do with owners of POEs wanting to solidify their relations with local politicians. However, such rush often leads to the sacrifice of the optimal timing for going public, which in turn results in their IPOs being lower quality and even premature. The statistical analysis by one study displays that companies that went public at the cusp of turnovers of politicians underperformed companies that went public outside the promotion or transfer timeframe by as high as 14.9 percent (Hung et al 2012).
Another aspect of timing of IPOs is the time it takes to complete the IPO process. As mentioned earlier, government regulations and policies have the effect of making it easier for SOEs to gain qualification from the CSRC to file for IPOs. They usually receive directions and financial support from the public sector and are almost always guaranteed to launch their IPOs. In contrast, POEs have more obstacles on the way to being listed on the stock exchange and the IPO process is more costly and more time-consuming for them.
In addition, the impact of described differences on IPO timing also manifests differently in the short run and in the long run. In the short run, SOEs tend to underprice its initial offerings much more than POEs. When a company is underpriced, it is easier for it to sell all of its stock and complete the IPO process. However, because underpricing is a major loss of investment for the company, POEs avoid it as best as they can whereas SOEs have government fund to make up for the loss of value. In the long run, POEs tend to perform better than SOEs in terms of financial returns, because for POEs the primary objective of going public is to enhance the company’s financial performance and growth, while for SOEs, the primary objectives can be mixed with political agendas.
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