Expropriation, Weak Corporate Governance and Post-IPO Performance: Chinese Evidence

This study provides evidence that Chinese initial public offerings (IPOs) report better operating performance than industry peers in the pre-IPO period, and worse performance in post-IPO period compared to the pre-IPO level. We find that related party transactions (RPTs) with controlling shareholders have significant effects on the long-run performance of IPO firms. Controlling shareholders structure a large percentage of operating (non-loan) RPTs to artificially boost revenues and/or profits of their IPO subsidiaries in the pre-IPO period. However, in the post-IPO period, controlling shareholders discontinue this RPT-based earnings manipulation practice and begin to expropriate IPO subsidiaries by obtaining a large percentage of cash loans, primarily in return for profits and/or resources transferred into the IPO subsidiaries in the pre-IPO period. Finally, we find that state-controlled IPO firms with a highly concentrated ownership structure and a less independent board of directors are more likely to be expropriated by controlling shareholders in the post-IPO period through related loans.