IPO suspension and pricing: Evidence from China

Abstract

Securities regulators in China occasionally suspend their IPO market. We explore the impact of IPO market suspension on IPO pricing. We find that IPOs interrupted by market suspensions are eventually priced at a higher level. The positive impact of IPO suspension on IPO offer price is more pronounced for IPOs backed by venture capitalists (VCs) and/or those with higher VC ownership. Further, we find that IPOs affected by market suspensions show poorer post‐IPO performance, and higher post‐IPO earnings management. Suspension‐affected firms ask for lower offer prices on seasoned equity offerings (SEOs) if they price their IPO shares at a higher level. Combined, our findings suggest that IPO suspensions result in an unexpected wealth transfer from secondary market investors to pre‐IPO investors, and thus the higher offer price for suspension‐affected IPOs is a manifestation of the wealth transfer.