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IPO Performance Under Different Regulatory Regimes: Evidence from Hong Kong

This paper studies the impact of a regulatory change of listing rules on the long-term IPO performance in the Hong Kong stock market. This regulatory change, introduced in 1994, imposed a three-year prelisting earning requirement on new issues. Our sample includes 287 IPOs registered on the Hong Kong stock market between 1986 and 1996. We find that there is no significant difference in short-term performance between IPOs before and after the regulatory change. The findings reveal that IPOs listed after the regulatory change have generated a higher medium-term return than those listed before the change and there is no significant difference in the long-term return between IPOs listed before and after the regulatory change. Like other markets, all IPOs registered before and after the regulatory change underperform the market indexes. We further divide our sample of IPOs registered before the regulatory change into two sub-samples; those that did and those that did not fulfil the earnings requirement. The result shows that there is no significant difference in medium-term and long-term performances between the two IPO sub-samples. However, we do find that IPOs listed after the regulatory change have a better medium-term performance than those listed before but would have met the earning requirements. Other factors, such as underwriter reputation, industry, total funds raised and market capitalization, are included in our analysis as control variables. The results seem to indicate that investors may not consider the pre-listing earning as an important criterion for IPO selection before the regulatory change. We further find the new listing rules with more stringent listing requirements do matter and could screen out IPOs with bad medium-term performance. But, the new listing requirements could not guarantee IPOs' long-term performance.