The Unintended Consequences of Regulations in Emerging Financial Markets: Evidence from the Chinese IPO Market

Abstract

This paper explores the impact of regulations imposed by Chinese authorities on the development of the Chinese IPO market. Because of limits on prices and proceeds, the Chinese IPO market does not attract companies that need cash the most. Some regulations exclude firms from the domestic IPO market. Other regulations induce firms with large growth options to list abroad. Some IPO firms that raise large amounts of cash decide to pay large dividends shortly after going public. Investors interpret this behavior as evidence that they overestimated the growth options of these firms at the time of their IPO and react accordingly.