Market Signaling and Chinese IPO Performance

Guiyang Xiong

Sundar Bharadwaj

University of Georgia

Worldwide IPOs are Declining

China IPOs Mirror the Global Trend

But China is Where the IPOs are at

More are Likely in 2013 (Waiting on a New Guanxi)

Information Asymmetry

Signaling Effects of Marketing Variables

• Brand reputation gains from overseas listing

• Relationships (Guanxi)

Source: Economist.com

http://www.google.com/url?sa=i&rct=j&q=+economist+china+ipo&source=images&cd=&cad=rja&docid=L4N_z7V3pIlAsM&tbnid=v2YWyQmEDoKvqM:&ved=0CAUQjRw&url=http://www.economist.com/blogs/graphicdetail/2013/01/focus&ei=hsQbUajLHYjW8gTWmICoBw&bvm=bv.42261806,d.eWU&psig=AFQjCNECdHRkgYnifehuTGLjef-20or1XQ&ust=1360860638413556

# & $ of Overseas Listings of Chinese firms

Brand Reputation Enhancement After Overseas Listing

(gold plating)

Use of Guanxi

Guanxi of Firms

• Guanxi is “the durable social connections and networks a firm uses to exchange favors for organizational purposes” (Gu et al. 2008).

• Guanxi is deeply rooted in the Chinese collectivist culture (Hwang 1987).

• Guanxi helps initiate dialogue, develop trust, and facilitate exchanges of favors for organizational purposes (Hoskisson et al. 2000).

• Guanxi can enhance a firm’s channel capability and responsive capability, leading to increased sales and market share (Gu et al. 2008).

Impact of Guanxi on Investors’ Valuation of the Firm

Trust &

Info.

Expected Future Cash-flows

Level

Speed

Volatility )

Firm Valuation

at IPO

• Connections with managers of other companies

• Connections with government officials

• Connections with managers of financial institutions

• Connections with managers of shared educational institution

Impact of Guanxi on Investors’ Valuation of the Firm

Trust &

Info.

Expected Future Cash-flows

Level Higher channel effectiveness; Higher revenue; Lower sales & transaction

costs; Lower cost of obtaining resources (e.g., Ganesan 1994; Gu et al 2008)

Speed Facilitates market penetration; increases

speed of adoption (Xiong & Bharadwaj 2011; Tuli et al 2007)

Volatility Smoother revenue streams; anticipate

changes and make necessary adjustments to cope with changes

(e.g., Gu et al 2008; Bharadwaj et al 2007)

Firm Valuation

at IPO

Connections with managers of other companies Connections with government officials Connections with managers of financial institutions Connections with managers of shared educational institution

Impact of Guanxi on Investors’ Valuation of the Firm

Trust &

Info.

Expected Future Cash-flows

Level Reduce the costs of obtaining rare

resources; access to private information / business opportunities helps generate

higher cash inflows

Speed Obtain government approval and access to

resources in a speedier manner; early access to important information

Volatility Access to information about potential

changes in regulations / policy before the actual changes occur, which enables firms

to plan ahead and adjust business strategy, reducing firm risk

Firm Valuation

at IPO

• Connections with managers of other companies

• Connections with government officials

• Connections with managers of financial institutions

• Connections with managers of shared educational institution

Impact of Guanxi on Investors’ Valuation of the Firm

Trust &

Info.

Expected Future Cash-flows

Level Reduce the costs of financing

Speed Obtain financial resources in a speedier

manner

Volatility Ability to obtain financial resources at

difficult market times, economic downturns, or other times when it is

difficult to obtain financing otherwise – this assures smooth financing support and

reduces firm risk

Firm Valuation

at IPO

Connections with managers of other companies Connections with government officials Connections with managers of financial institutions Connections with managers of shared educational institution

Impact of Guanxi on Investors’ Valuation of the Firm

Trust &

Info.

Expected Future Cash-flows

Level Increased access to private information /

business opportunities helps generate higher cash inflows and specialized

expertise (Cohen, Frazzini and Malloy 2008, 2009)

Speed

Quicker access to novel information

Volatility Solidarity, protects against volatility and

vulnerability of cashflows (Tuli, Bharadwaj and Kohli 2010)

Firm Valuation

at IPO

Connections with managers of other companies Connections with government officials Connections with managers of financial institutions Connections with managers of shared educational institution

Measures of Guanxi

Components of Guanxi identified by Gu, Hung, and Tse (2008), JM:

1. The senior management has personal relationships with important people.

2. The senior management is able to obtain government approvals, and resources like land and electricity from local authorities.

3. The senior management is able to obtain financing.

This study:

We proxy the components of Guanxi using secondary data

• Executives’/Directors’ inter-personal professional network based on their work experience Executives’/Directors’ Government background

• Executives’/Directors’ work experience at financial institutions

Measures of Guanxi

Components of Guanxi identified by Gu, Hung, and Tse (2008), JM:

1. The senior management has personal relationships with important people.

2. The senior management is able to obtain government approvals, and resources like land and electricity from local authorities.

3. The senior management is able to obtain financing.

This study:

We proxy the components of Guanxi using secondary data

• Executives’/Directors’ inter-personal professional network based on their work experience

• Executives’/Directors’ Government background

• Executives’/Directors’ work experience at financial institutions

Measures of Guanxi

Components of Guanxi identified by Gu, Hung, and Tse (2008), JM:

1. The senior management has personal relationships with important people.

2. The senior management is able to obtain government approvals, and resources like land and electricity from local authorities.

3. The senior management is able to obtain financing.

This study:

We proxy the components of Guanxi using secondary data

• Executives’/Directors’ inter-personal professional network based on their work experience

• Executives’/Directors’ Government background

• Executives’/Directors’ work experience at financial institutions

Measures of Guanxi Components of Guanxi identified by Gu, Hung, and Tse (2008), JM:

1. The senior management has personal relationships with important people.

2. The senior management is able to obtain government approvals, and resources like land and electricity from local authorities.

3. The senior management is able to obtain financing.

This study:

We proxy the components of Guanxi using secondary data

• Executives’/Directors’ inter-personal professional network based on their work experience

• Executives’/Directors’ Government background

• Executives’/Directors’ work experience at financial institutions

Data sources:

• Archival data: IPO Prospectus; BoardEx

• Stock market investors use the same sources of information

• Do different components of Guanxi have different impact on firm performance?

Heterogeneity in Guanxi Across Firms

• 147 IPO’s in China Main Stock Markets from 2000 to 2010

Types of

Inter-organizational Connections

Mean Std. Dev.

Government departments connected

.8367 1.9198

Companies Connected

3.2721 8.8438

Financial Institutions Connected

.1701 .6234

Educational Institutions Connections

2.9796 5.9731

Types of Inter-personal Connections

Mean Std. Dev.

With Government officials

41.41 91.70

With other firms’ executives / directors

59.14 191.21

With persons of financial institutions

2.93 20.43

With persons of educational institutions

76.19 214.15

Dependent Variable: IPO Underpricing • Dependent Variable: IPO Underpricing

• Percent difference between the closing price of the first trading day and the initial offering price (Loughran and Ritter 2004; Luo 2008)

• The larger the difference, the more the stock is underpriced, and the more money is left on the table

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=fuz0knZMnlJjYM&tbnid=6DJ-BtUI5AqmNM:&ved=0CAUQjRw&url=http://civicbeacon.com/2010/12/09/chinese-startups-profit-big-from-us-ipos/&ei=sWw7UuaQHJTa8AS8hID4DA&bvm=bv.52434380,d.eWU&psig=AFQjCNHijiqpVzzhd8QbF3NtdYYGBFIc-g&ust=1379711863767397http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=WrPAYH8J5IoAUM&tbnid=4OUa4m7bTrPbbM:&ved=0CAUQjRw&url=http://blogs.wsj.com/deals/2012/03/02/linkedin-groupon-yelp-the-best-first-day-pops-among-recent-internet-ipos/&ei=5HE7UvLgKYXa9QTe7ICwCw&bvm=bv.52434380,d.eWU&psig=AFQjCNEYyHA4JLUSDQvlxRdv_6GQ4Ff3Rw&ust=1379713883874725

Preliminary results

Coefficients

% of Government Connections -3.216*

% of Industry Connections -3.547*

% of Financial Inst. Connections -5.008

% of Educational Inst. Connections -3.407*

ln(Total Number of Guanxi Ties) -.373*

Venture Capital Backing .665

Next Steps • Strength of Guanxi ties, in addition to the

number of Guanxi ties

• Enriching the Guanxi measures

– In addition to direct degree centrality

• Closeness Centrality (relative closeness to indirectly connected organizations)

• Betweenness Centrality (a node that lies on communication paths between other nodes)

Next Steps • Value of Guanxi over time

• Contingency Effects

• Compare the impact of Guanxi in China versus in U.S.

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=lvO5VRjDfCZKQM&tbnid=OBLXRcvWymrv6M:&ved=0CAUQjRw&url=http://www.businessweek.com/finance/occupy-wall-street/archives/2011/11/groupon_beware_of_20_hot_ipos_20_tanked_later.html&ei=RXM7UrydDozm8gSB-4GICg&bvm=bv.52434380,d.eWU&psig=AFQjCNEYyHA4JLUSDQvlxRdv_6GQ4Ff3Rw&ust=1379713883874725

Contingency Effects

Firm Valuation

at IPO

Market Turbulence

Competitive Intensity

Technological Turbulence

(Gu et al 2008; Saboo & Grewal 2013)

Expected Contributions

• Signaling effects of marketing variables

• Quantifying the financial impact of guanxi

• Implications for guanxi management and firm resource allocation:

– Which type of guanxi is more valuable?

– When does guanxi have a stronger impact?

– Asymmetric impact in China vs in U.S.?

Greater China IPO’s

India IPOs

http://online.wsj.com/article/SB10001424127887324296604578177041785270314.html

http://online.wsj.com/article/SB10001424127887324296604578177041785270314.html

http://www.ft.lk/2011/08/05/so-you-want-to-take-the-ipo-road/

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=WrPAYH8J5IoAUM&tbnid=4OUa4m7bTrPbbM:&ved=0CAUQjRw&url=http://blogs.wsj.com/deals/2012/03/02/linkedin-groupon-yelp-the-best-first-day-pops-among-recent-internet-ipos/&ei=Nm47UuH6GYai9QSEjYDgCA&bvm=bv.52434380,d.eWU&psig=AFQjCNH4niZN0AdUxuoGPuNCEvENi55YaA&ust=1379712921256287