Investor Disagreement, Government Subsidies and the Abnormal Day-one Returns of IPOs: Evidence from China

Xiaoying Zhai, Yahui Hao, Eric M. Scheffel, Yongmin Zhang

Research output: Journal PublicationArticlepeer-review

Abstract

Based on irrational investor behavior and by exploiting newly constructed proxy measures for investor disagreement, we develop and test a theory which can successfully account for excessively high returns observed on the first day of IPOs launched in China’s stock markets. 93.8% of IPO companies in our sample received government subsidies, prompting us to examine whether and to what extent government subsidies categorized as “science and technology”, “international” and “other” affect the day-one return of IPOs. Also, to further examine the extent to which government subsidies may indirectly affect returns, we incorporate and study estimated interaction terms between government subsidies and investor disagreement to investigate the role of this particular non-linear channel. The results show that returns on companies receiving government subsidies are lower on average than on those who did not receive any government subsidies prior to their IPO, and that the higher the government subsidy, the lower the level of investor disagreement and the lower the IPO day-one return.

Original languageEnglish
Pages (from-to)3522-3550
Number of pages29
JournalEmerging Markets Finance and Trade
Volume56
Issue number14
DOIs
Publication statusPublished - 13 Nov 2020

Keywords

  • G12
  • abnormal day-one IPO returns
  • government subsidies
  • investor disagreement

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance (all)

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