Institutional Environment and IPO Strategy : A Study of ChiNext in China

Taking an institution-based view, we investigate how entrepreneurs respond to immature regulatory environments in order to be listed on stock markets in countries with an emerging economy. Unlike in stock markets in developed countries, in emerging markets gaining government approval for listing is a critical and unpredictable process for entrepreneurs. Hence, entrepreneurs who are preparing for a public offering might give substantially discounted shares to venture capital (VC) investors. This will lead to higher investment returns in pre-IPO deals than those at earlier stages, which distorts the risk-return tradeoff found in developed markets. In particular, the VC investors affiliated with powerful organizations that can promise entrepreneurs preferential access to stock market gatekeepers will gain even higher pre-IPO investment returns. The associated additional institutional rents earned by VC investors, however, are expected to decrease over time, as the stock markets mature. Related hypotheses with regard to the investment timing, VC firm affiliations with government agencies, securities traders, and universities are tested using data from ChiNext in China (2009-2013). This study highlights that institutional factors can have different impacts on the behavior of participants in emerging markets than in developed markets. It also extends current theories derived almost exclusively from developed markets