Do Macroeconomic Factors Affect IPO’s in China?

Author(s)

Thian Cheng Lim , Yun Liu , Xiu Yun Lim , Riuyang Zhai ,

Download Full PDF Pages: 45-55 | Views: 372 | Downloads: 99 | DOI: 10.5281/zenodo.3401871

Volume 1 - October 2012 (10)

Abstract

This paper investigates the effect of macroeconomic variables on the numbers of IPOs in China. There are limited studies on this topic. Changes in macroeconomic variables such as interest rates, GDP (Gross Domestic Product), inflation rate and the unemployment contain useful information for stock market participants (Chen et al., 1986). 5 hypotheses are proposed for empirical testing using Cointegration and Vector Error Correction models. Data will cover the period from 2007 to 2012. We expect to find evidence of a significant negative relationship between interest rate and the numbers of IPOs, and a significant positive relationship between industrial production and the numbers of IPOs to be confirmed. 

Keywords

interest rates, IPOs, Markov regime switching regression, China

References

  1. Aggarwal, R., Klapper, L., & Wysocki, P. D. (2005). Portfolio preference of foreign investors. Journal of Banking and Finance, 29, 2919–2946.
  2. Ameer, R. (2007). What moves the primary stock and bond markets? Influence of macroeconomic factors on bond and equity issues in Malaysia and Korea. Asian Academy of Management Journal of Accounting and Finance.3(1), 93–116.
  3. Avramov, D., & Chordia, T. (2006). Predicting stock returns. Journal of Financial Economics. 82, 387–415. Baker, M and J. Wurgler.( 2002). Market timing and capital structure. Journal of Finance. 57,1-32.
  4. Brau, J. C., Francis, B., & Kohers, N. (2003). The choice of IPO versus takeovers: Empirical evidence. Journal of Business, 76(4), 583–612.
  5. Bernanke, B. S., & Gertler, M. (2001). Inside the black box: the credit channel of monetary policy transmission. Journal of Economic Perspectives. 9, 27– 48.
  6. Bilson, C. M., Bailsford, T. J., & Hooper, V. J. (2001). Selecting macroeconomic variables as explanatory factors of emerging stock market returns. PacificBasin Finance Journal. 9(4), 401–426.
  7. Campbell, J. Y. Lettau, M. Malkiel, B. G., & Xu, Y. (2001). Have individual stocks become more volatile? An empirical examination of idiosyncratic risk. Journal of Finance. 56, 1–43.
  8. Chan, KL, Wang, JB &Wei, KCJ. (2004). Underpricing and longterm performance of IPOs in China. Journal of corporate finance. 10(3), 409-430.
  9. Chen, N., Roll, R., & Ross, S. (1986). Economic forces and the stock markets. Journal of Business.59, 383–403.
  10. Chen, S. S. (2007). Does monetary policy have asymmetric effects on stock returns? Journal of Money Credit and Banking. 39, 667–688.
  11. Chen, N., Roll, R., & Ross, S. (1986). Economic forces and the stock markets. Journal of Business. 59, 383–403.
  12. Chen, Z. H., J. J. Choi, and C. Jiang (2008). Private Benefits in IPOs: Evidence from StateOwned Firms. In: Second Singapore International Conference on Finance 2008 , Singapore March 15, 2008.
  13. Chen, S. S. (2009). Predicting the bear stock market: Macroeconomic variables as leading indicators. Journal of Banking and Finance. 33, 211 223.
  14. Chang, K-L. (2009). Do macroeconomics variables have regime dependent effects on stock return dynamics? Evidence from the Markov regime switching model. Economic Modelling 26. 1283–1299.
  15. Fama, E. F. (1985). What's different about banks? Journal of Monetary Economics. 15, 29–39.
  16. Fama, E. F., & French, K. R. (1989). Business conditions and expected returns on stock and bonds. Journal of Financial Economics. 25, 23–49.
  17. Fama,E.F. (1990). Term-structure forecasts of interest rates, inflation and real returns. Journal of Monetary Economics. 25, 59- 76.
  18. Fama,E.F. (1981). Stock returns, real activity, inflation, and money. The American Economic Review. 71(4), 545-565.
  19. Fan, J.P.H., T.J., Wong, and T.Y. Zhang (2007), “Organizational Structure as a Decentralization Device: Evidence from Corporate Pyramids, Working Paper, Chinese University of Hong Kong and City University of Hong Kong.
  20. Fuerst, M. E. (2006). Investor risk premia and real macroeconomic fluctuations. Journal of Macroeconomics. 28, 540–563.
  21. Goetzmann, W. N., & Jorion, P. (1999). Re-emerging markets. Journal of Financial and Quantitative Analysis. 34, 1–32.
  22. Ibbotson, R. G.; Sindelar, J. L.; and Ritter, J. R. (1994). The market’s problems with the pricing of initial public offerings. Journal of Applied Corporate Finance. 7,66-74.
  23. Ibbotson, R. G., and Jaffe, J. F.. (1975). “Hot Issue” markets. The Journal of Finance. 30, 1027- 1042.
  24. Ibbotson, R. G., Sindelar, J. L.; and Ritter. (1988). Initial public offerings. Journal of Applied Corporate Finance. 1(2), 37-45.
  25. Jovanovic, B., & Rousseau, P. L. (2004). Interest rates and Initial  Public Offerings. National Bureau of Economic Research Working Paper 10298. Massachusetts Avenue, Cambridge, MA.
  26. Jensen, G. R., & Johnson, R. R. (1993). An examination of stock price reactions to discount rate changes under alternative monetary policy regimes. Quarterly Journal of Business and Economics 32 (Spring). 26– 31.
  27. Jensen, G. R., Mercer, J. M., & Johnson, R. R. (1996). Business conditions, monetary policy and expected security returns. Journal of Financial Economics. 40, 213– 237.
  28. Kaminsky, G. L., Lyons, R., & Schmukler, S. L. (2001). Mutual fund investment in emerging markets: An overview. The World Bank Economics Review. 15(2), 315–340.
  29. Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: International insights. Pacific Basin Finance Journal. 2(2), 165–200.
  30. Lowry, M. (2003). Why does IPO volume fluctuate so much? Journal of Financial Economics. 67, 3–40.
  31. Lowry, M., Schwert, G. (2002). IPO market cycles: bubbles or sequential learning? Journal of Finance. 57, 1171–1200.
  32. La Porta, R., F.Lopez-de-Silanes, A. Shleifer and R. Vishny.( 1997). Legal determinants of external finance. Journal of Finance. 52, 1131-1150.
  33. Loughran, T., and Ritter, J. R. (1995). The new issues puzzle. Journal of Finance. 50,23-51.
  34. Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: International insights. Pacific Basin Finance Journal. 2(2), 165–200.
  35. Lowry, M. (2003). Why does IPO volume fluctuate so much? Journal of Financial Economics.67, 3–40.
  36. Neumeyer, P. A., & Perri, F. (2005). Business cycles in emerging economies: The role of interest rates. Journal of Monetary Economics. 52(2), 345–380.
  37. Pagano, M., Panette, F., & Zingales, L. (1998). Why do companies go public? An empirical analysis. Journal of Finance. 53(1), 27–64.
  38. Pastor, L. and P. Veronesi. (2005). Rational IPO waves. Journal of Finance, 60, 1713- 1757.
  39. Petersen, M., & Rajan, R. (1997). Trade credit: Theories and evidence. Review of Financial Studies. 10(3), 661–691.
  40. Reese, W. P. (1997). The arrival rate of initial public offers in the UK. European Financial Management. 3(1), 45–62.
  41. Rydqvist, K., & Hőgholm, K. (1995). Going public in the 1980s: Evidence from Sweden. European Financial Management. 1, 287–315
  42. Ritter, J. R. (1991). The long-run performance of initial public offering. Journal of Finance. 46, 3–27.
  43. Ritter, J. R. (1984). The ‘hot issue’ market of 1980. Journal of Business. 57,215-240.
  44. Schultz, P. (2003). Pseudo market timing and the long-run underperformance of IPOs. The Journal of Finance.58(2), 483– 518.
  45. Tian, Lihui & Megginson, William L. (2005). Extreme underpricing: determinants of Chinese IPO initial returns. Avalible at: http://www.efmaefm.org/efma20 06/papers/708035_full.pdf
  46. Tran, A. L., & Jeon, B. N. (2011). The dynamic impact of macroeconomic factors on initial public offerings: Evidence from time series analysis. Applied Economics. 43(23), 3187–3207.
  47. Uribe, M., & Yue, V. Z. (2006). Country spreads and emerging countries: Who drives whom? Journal of International Economics.69(1), 6–36.
  48. Williamson, O. E. (1988). Corporate finance and corporate governance. The Journal of Finance. 43, 567–591

Cite this Article: