“IPO pricing deregulation and corporate governance: Theory and evidence from Chinese public firms”
Ping He, Lin Ma, Kun Wang, Xing Xiao
In: Journal of Banking and Finance, 2019, Vol. 107
The disciplinary role of the financial market could interact with a firm’s choice of internal corporate governance. He et al. prove that when the efficiency of the initial public offering (IPO) pricing improves, entrepreneurs choose stronger corporate governance structures as way of committing to extract fewer private benefits in exchange for higher prices. Using a difference-in-difference method that exploits the asymmetric impacts of the IPO pricing deregulation on the Chinese mainland and Hong Kong markets, they find that improving the efficiency of IPO pricing has a positive impact on a firm’s corporate governance quality. This impact is more pronounced for firms with lower tangibility, for firms with higher market-to-book ratios, and for state-owned enterprises. Their findings demonstrate that the development of the financial market can promote economic development through improving corporate governance.