Abstract
This study investigates the reported operating performance of Chinese IPOs (Initial Public Offerings) before and after the IPO. It shows that Chinese IPOs report a significant decline in operating performance relative to the pre-IPO level, in terms of Return on Assets (ROA) and Operating Cashflow on Assets (CFO). Importantly, the study explores the explanations for the operating performance from before to after the IPO. It starts with testing the 'Managerial Ownership Dispersion Hypothesis'. However, there is no evidence that the decline in reported operating performance of Chinese IPO firms is associated with the change in managerial ownership from before to after the IPO. Managers in Chinese listed firms hold a very small percentage of ownership, which is too small to make any effective impact on corporate operating performance, and there is no significant decrease In the post-IPO managerial ownership relative to the pre-IPO managerial ownership. So, in this sense, Chinese IPO data cannot provide empirical evidence to support the Managerial Ownership Dispersion Hypothesis, which is conjectured by Jensen and Meckling (1976). This study also tests the 'Earnings Management Hypothesis' to explain the operating performance decline of Chinese IPOs from before to after the IPO. There is significant evidence that Chinese IPO firms manipulate accruals so as to boost pre-IPO reported earnings. Besides accruals manipulation, this study further investigates related party transactions (RPTs) around the IPO. The findings show that related party transactions between IPO firms and controlling shareholders have significant effects on reported operating performance of IPO firms. The abnormally high reported operating performance in the pre-IPO period is positively associated with the size of operating RPTs (non-loan) between controlling shareholders and IPO firms in the pre-IPO period. Evidently, controlling shareholders significantly structure artificial operating RPTs to boost revenues and/or profits of their IPO subsidiaries. However, in the post-IPO period, controlling shareholders discontinue these RPT-based manipulative practices, and begin to expropriate IPO subsidiaries by obtaining cash loans from IPO subsidiaries, primarily in return for profits and/or resources transferred into IPO subsidiaries in the pre-IPO period (Cheng et al., 2007). The post-IPO operating performance is negatively associated with the size of such loans by IPO firms to controlling shareholders in the post-IPO period.