Private benefits in IPOs: Evidence from state-owned firms

The IPO literature suggests that top executives may intentionally underprice their firms’ IPOs to pursue private benefits.  But little systematic evidence exists that executives receive private benefits personally.  Using a unique dataset of the Chinese state-owned firms that went public during 1990-2010, we find evidence supporting that CEOs of state-owned firms attempt to get promotions by underpricing IPOs and allocating IPO shares to parties important to their careers.  Specifically, we find that i) executives’ chance of promotion is positively correlated with the level of IPO underpricing, and ii) those executives who can benefit more from underpricing, such as younger executives, actually underprice more.  We do not find similar effects in private firms.  We also document a significant cost, in the form of punishments, associated with this agency behavior.

We use Chinese IPO data for our study.  We hand collect a dataset that traces the career paths of all CEOs of the Chinese state-owned firms that went public from 1990 to 2010.  It contains information about the CEOs’ promotions as well as punishments (such as demotion, sanction and arrest) after IPOs.  In particular, 5 percent of the state firm CEOs are arrested in our sample.  This suggests that the executives have to trade-off the costs and benefits as they pursue private benefits.  This dataset enables us to study the trade-off directly.

Another unique feature of this analysis is that the incentive to expropriate firm wealth differs across CEOs based on observable characteristics.  For instance, a younger executive may have a stronger incentive to underprice his IPO more than an older one because the government is more willing to promote younger people.  On the other hand, for the older executive close to the official retirement age, there is little chance of getting promoted by allocating underpriced IPO shares.  Thus we can test whether an executive with a higher incentive to underprice would actually underprice more.

 

Back to: Entrepreneurship, Managerial Economics, and Business Administration

<< Previous Abstract | Next Abstract