Discretionary Administrative Power and Conflicts of Interest in China's IPO Approvals

Heng Geng, Harald Hau and Hanzhang Zheng
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Heng Geng: Victoria University of Wellington
Hanzhang Zheng: University of Geneva and Swiss Finance Institute

No 24-54, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: China's IPO approval process co-opts audit firm representatives into the regulatory decision body, which creates conflict of interest and potential channels for corruption. We show evidence that co-opted auditors (i) do not differ in their auditing practice of listed firms from other auditors, but (ii) attract more borderline IPO clients that do not fully comply with the listing requirements, contributing to higher audit revenue growth, (iii) increase the chance of IPO approval for their borderline candidates, which (iv) afterwards underperform regular IPO stocks by 39% in terms of their average two-year buy and hold return. Moreover, (v) these borderline IPO firms show poorer profitability than matched firms, suggesting potential misrepresentation of firm prospects at the IPO stage.

Keywords: corruption of professional standards; IPO underperformance; regulatory failure (search for similar items in EconPapers)
JEL-codes: G14 G15 G18 G38 H11 P27 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2024-10
New Economics Papers: this item is included in nep-acc and nep-cna
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2454

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