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Review of Finance Vol. 27 No. 3 2023

Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets

Charles M. C. Lee1,2; Yuanyu Qu3; Tao Shen4

1 Graduate School of Business, Stanford University · 2 Foster School of Business, University of Washington , · 3 School of Banking and Finance, University of International Business and Economics · 4 School of Economics and Management, Tsinghua University

open access

Abstract

From 2007 to 2020, unlisted Chinese firms paid an average of over US $500 million to listed firms for their shell value in reverse merger transactions. We show that this large shadow price for a public listing sheds light on other features of Chinese markets, including (i) near-zero mortality rates, (ii) frequent major-asset restructurings (MARs), (iii) insensitivity of small-firm prices to corporate earnings, and (iv) a large size effect. A firm-level measure of expected shell probability (ESP) predicts stock returns, MARs, earnings-to-price sensitivity, and short-window returns to initial public offering-related regulatory news. Furthermore, adding ESP to existing pricing models for Chinese stocks significantly improves model performance.

DOI
10.1093/rof/rfac044
Volume
27
Issue
3
Pages
809-849
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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