Content

 

1．Introduction……………………………………………………..4

1.1  VC development in China……………………………………..4

1.2  Effects of VC in IPO process…………………………………4

1.2.1 Positive effects………………………………………………….4

1.2.2 Negative effects………………………………………………...5

1.3  The purpose of the research…………………………………5

 

2.0  Literature Review……………………………………………….5

2.1  Contracting Theory and practices…………………………..5

2.1.1 Principal agent Theory………………………………………..5

2.1.2 Incomplete Contracting Theory……………………………..6

2.2  Investment Banking Role……………………………………..6

 

3.0  Research Design……………………………………………….7

3.1  Research Hypothesis………………………………………….7

3.2  Data……………………………………………………………….8

3.3  The measurement of Data…………………………………….9

3.4  Variable…………………………………………………………11

3.5  Regression Model…………………………………………….12#p#分頁標題#e#

 

4.0  Results analysis………………………………………………13 

4.1  Descriptive statistics…………………………………………13

4.1.1 Basic situation………………………………………………...13

4.1.2 Change of indicators…………………………………………13

4.1.3 The effect of IPO on the profitability of companies…….15

4.2 Significance Testing……………………………………………16

4.3 Regression Analysis……………………………………………16

 

5.0 Conclusion and suggestions…………………………………17

 

Appendix……………………………………………………………..20

 

Reference……………………………………………………………..22

 

The investment banking role in IPO and their practice, institutional investors(PE,VC) function in IPO and their performance

 

風險投資被認為是高風險、高回報和高增長潛力的投資。通過向公司提供管理咨詢、社交網絡和其他增值服務，可以促進公司的發展，最后，通過支持上市公司或股權轉讓，可以獲得巨額的利潤和高額的投資回報。風險投資被認為是技術革命的重要驅動力，完善的風險投資體系的存在關系到一個國家的高新技術產業的發展。

在當前的世界金融市場，風險投資（VC）已經成為企業融資的重要渠道，數據顯示，從2015到2016，在美國229家公司獲得了數十億美元的投資，在這些企業的發展起到了非常重要的作用。

 

I.0 Introduction 簡介

 

1.1 VC development in China

Risk investment is regarded to be investment of high risk and high return and high growth potentials. By providing management consulting, social network and other value-added services to the company, VC institutions can promote the development of the company, and at last, they can obtain huge profits and high returns on investment by supporting the listed companies, or by equity transferring. Risk investment is considered to be important driving force of technological revolution for IT, and presence of perfect risk investment system is related to the development of a country's high-tech industry.#p#分頁標題#e#

In the current world financial markets, venture capital (VC) has become an important channel for financing of start-ups, the data show that from 2015 to 2016, 229 companies in the United States have acquired VC of billions of dollars, which played a very important role in the development of these enterprises (Gill, 2016). 

 

In last century, China has realized the importance of risk investment which can promote sustainable economic development, after the first national venture capital company new technology venture investment companies in China was established, a large number of investment companies with the government backgrounds have been set up. Sustained growth of Chinese economy provides a huge space for development to small and medium-sized enterprises on one hand, and on the other hand, it inevitably puts forward higher requirements to the market-oriented reform of financial system and the establishment of capital market. In order to build a multi-level capital market, it is necessary to further promote the functions of capital of reasonable pricing, optimal allocation of resources, risk dispersing and wealth creation, etc. The VC institutions have huge impetus to the development of the invested enterprise, because it not only provides funding support for risk enterprise, but also professionally help and supervise the risk company through involvement in corporate governance and risk management decisions. So, it effectively improves the level of corporate governance and management and promotes the development of small and medium-sized.

 

1.2 Effects of VC in IPO process

1.2.1 Positive effects

Supervision and screening effect theory suggests VC is through strict screening of proposed enterprises before investment and supervision, management towards the enterprises invested after investment to promote the growth of the enterprises (Kini, 1994). Certification effect theory comments, because VC can professionally discover good quality companies to invest in the companies, share-holding of VC will be taken as certification for the issuing companies to transfer the signal that the companies have a good future to investors (Faulhaber, 1989). Market force theory suggests that VC can attract a large number of high-quality market partners, such as underwriters, institutional investors and analysts, thus it can help companies to get a higher valuation and better prospects for development (Loutskina, 2006). 

 

1.2.2 Negative effects

Because of the presence of asymmetric information between VC parties and enterprises, enterprises with poor quality have more motivation and incentive to actively introduce risk investment, but good companies are reluctant to introduce, this is the adverse selection phenomenon (Raphael, 1990). Investment institutions with less experience and low prestige have more motivation to prematurely promote listing of immature enterprises, which is considered as grandstanding phenomenon (Gompers, 1996).#p#分頁標題#e#

 

1.3 The purpose of the research

For a long time, there are different views form the academic community on the effects of venture capital on financing of enterprises, some scholars believe that the existence of VC has a positive impact on corporate finance, therefore, they have proposed theories such as certification effect, supervision and screening effect and effect of market power (Bradley, 2015; Sahaym et al., 2016). Some scholars believe that the presence of VC also has a negative impact on corporate finance, therefore, they have put forward theories of adverse selection, grandstanding hypothesis effect. In this study, it aims to take Chinese stock market as the research object to discuss in the immature Chinese financial market, what is the impact of VC on corporate IPO, by empirical findings to confirm and support that which theory mentioned above can better explain the effect of VC in enterprises.

 

2.0 Literature Review 文獻綜述

 

2.1 Contracting theory and practice

2.1.1 Principal-agent theory

Principal-agent theory mainly analyzes that in accordance with contracts, one or more behavior subjects designate, hire some other behavior subjects to serve them, while the latter are granted with certain decision-making rights and paid with appropriate compensation. (Baron, 1982) and (Sahlman, 1990) hold the opinion that it should design a set of incentive and restraint mechanisms towards agents to maximize reducing the transaction costs due to the adverse selection and moral hazard, so that the smooth operation of VC projects can be guaranteed.

2.1.2 Incomplete contracting theory

Grossman and Hart (1986) bring forward incomplete contracting theory, proposing that the drafting of a complete contract is impossible, it should be residual rights of control which plays a key role in the allocation of resources, it is efficient to configure residual rights of control to the relatively important one of investment decision. In addition, there are differences between theoretical and practical uses (Burchardt et al, 2014). 

Principal-agent theory and incomplete contracting theory provides a theoretical basis for understanding how VC takes effect in IPO process of enterprises.

 

2.2 Investment banking role

Investment banks are products during the development of joint-stock company and security company in a specific stage, and it is also the important subject of the developed securities market and mature financial system. In the modern social and economic development, investment banks plays an important role in exchanging information of capital supply and demand, building the structure of the securities market, promoting enterprise mergers and acquisitions, promoting industrial concentration and economies of scale formation and optimizing the allocation of resources (McKinnon, 2010). Initial public offering refers to situation that a company would like to sell its shares to the public for the first time. Normally, the shares of listed companies will issue a prospectus or registration statement that agreed the terms of the selling through brokers or jobbers which based on the corresponding securities. In general, once after the completion of the initial public offering, the company can apply for IPO in the stock exchange or traded quotation system (Aggarwal, 2002).#p#分頁標題#e#

 

(1) Investment banks have the functions of information verification and information production. Compared with the secondary market, the continuous information disclosure of listed companies to the public in the IPO market is worse due to the fact that it is their first time to disclose information about their funding project, so the degree of information asymmetry is particularly serious. In every period of the IPO market all the world, there is significant IPO discount phenomenon, and the most important factor of IPO discount is information asymmetry between the issuer and investors, the higher the degree of information asymmetry, the larger of IPO discount would occur (Chi and Padgett, 2005). The main mechanism which aims to alleviate the IPO market information asymmetry is the introduction of investment banks with good reputation to maintain its reputation capital. Investment bank with higher reputation can attract the companies with high quality and low risk, so issuing company could choose investment banks to send out signals that the company has higher reputation.

 

(2) There is not only the effect on the issuing company's choice of investment banks, but also there is effect on investment bank’s choice. Distribution company choose investment banks according to the investment bank's information identification ability, stock promotion and sales ability, investment Banks will also choose companies according to the size, difficulty and the  possibility of future equity financing (Hayward, Boeker, 1998). Therefore, higher ability of investment banks will choose companies that can bring higher fees from the perspective of themselves.

 

(3) Mutual chooses between distribution companies and investment banks can affect financial function of investment banks. The choice of investment banks is based on its distribution costs as well as the balance of discount rate. The features of the company and distribution characteristics will affect the issuer's choice of investment banks. The smaller of the company size and the lower the rate of return, the greater of the cost in the stock promotion and the higher ratio of total shares of the company's issued shares, these factors will lead to the consequence that the company issue reduce IPO discount rate so as to get more interests, and there is more likely that for them to hire investment Banks that have better reputation to underwrite (Höbarth, 2006).

 

(4) In recent years, more studies have proved investment banks will influence discount rate of IPO, promotion, stock pricing and other functions of underwriting activities. And apart from that, investment banks may influence discount rate of IPO by financing and providing report before underwriting activities, or the support non-price services after underwriting activities. Although the competition in the supply of investment banking services is fierce, these non-price services are relatively scarce, which leads to the phenomena that investment banks can get certain monopoly power in the market segment. As a result, many investment banks survive in a fully competitive market while the customers are willing to accept the high IPO discount rate. Therefore, Investment Banks can provide continuous supervision function for IPO issuance company.#p#分頁標題#e#

 

(5) Investment clients could transfer earnings of discounted price of IPO by trading commission (Ljungqvist, 2005). The information asymmetry in the IPO market is the important precondition for the finance function of investment banking, but at the same time, it also contributed to the agency problem between investment banks and issuing company. Investment bank is an independent financial intermediary that pursue maximization of self-interest, and it also has incentives to pursue their own interests by using the information asymmetry in IPO market. 

 

3.0 Research design  研究設計

 

3.1 Research hypothesis

VC could provide value-added function and help to supervise the invested enterprise, therefore, companies without risky investment have lower level of earnings management. Accordingly, their performance will be improved. Based on relevant theory about VC and mature capital market research. Here is the hypothesis about the study.

 

H0：VC has positive effect on the performance of companies. but due to imperfect system in China, the motivation of fleeing profit may be larger than participating in enterprise management. So, VC may have reverse effect on the performance of companies. 

 

H1: VC will reduce the company's operating performance

 

3.2 Data

This article would like to focus on the research about the effect of VC on the listed companies operating performance before and after IPO. Since it is a process, the analysis can't possibly use index of a single year to represent the situation before and after the IPO. In order to enhance the scientific nature of this research, this paper will be designed to use average index of the previous two years and later two years, and divide those as two groups, on behalf of its performance in before and after IPO respectively. The relevant data is mainly from the Wind Data Base, the China Stock Market and Accounting Research (CSMAR) database, and hand-collected from IPO Prospectuses. As data shows, by 2011, the GEM (Growth Enterprise Market) has 355 listed companies. And in the paper, 159 companies are selected for analyzingby SPSS. This article adopts the financial data which mainly come from China's listed companies financial indicators analysis database, In order to obtain the detailed condition of VC of GEM listed company and the situation of the first largest shareholder, the authors refer to find the prospectus of various listed companies. Due to some financial indicators in the database does not exist or some information is inefficient, the author collected the year of the corresponding original financial statements, and extract relevant subjects balance so as to calculate the main business revenue growth, net profit growth rate, and the first two years of net assets profit margin and other index according to the formulas. #p#分頁標題#e#

 

Growth Enterprise Market (GEM) is astock market set up by Stock Exchange of Hong Kong for growth companies that do not fulfill the requirements of profitability or track record. (Wikipedia) 

This board profoundly enriched the exit channels for VC investment. Together with China’s economic growth, these institutions attracted a wave of funds into VC industry (Anderson)

 

3.3 The measurement of data

Comparison of operating performance before IPO is achieved by comparing profitability index and growth index, if there is statistical difference between VC-backed companies and non-VC-backed companies in terms of these indices, it to some extent validates "screening "effect of VC, showing that VC is more able to select more growing enterprises.

 

Comparison of operating performance during IPO is achieved by comparing VC-backed companies with non-VC-backed companies in terms of price-earnings ratio, underpricing, allocation rate, if there is statistical difference between these two kinds of enterprises, it will verify certification theory that VC as a third-party of certification is able to deliver the signal that a company has better prospects to investors, so the majority of investors will be more easily to recognize VC-backed companies, which reflected that VC-backed companies have higher price-earning ratio, lower underpricing rate, lower allocation rate and lower costs of issuing. In addition, if underwriters of VC-backed companies have a higher reputation than underwriters of non-VC-backed companies, and the institutional investors hold more shares, the analysts have higher levels, indicating that VC can attract more and higher quality market participants, which proves market power hypothesis.

 

Comparison of operating performance of companies after IPO is achieved through comparing of profitability index and growth index, if there is statistical difference between VC-backed companies and non-VC-backed companies in terms of these indices, it to some extent validates the supervision effect of VC and to some extent proves that VC is possible to promote the growth of companies through a variety of value-added services.

 

In this paper, some of the index will be adopted to analyze the change before and after IPO. According to the different content of the performance evaluation, the enterprise operating performance can be divided into financial evaluation and non-financial evaluation. Financial evaluation is based on the financial statements and other related information, which aims to build a scientific system of financial analysis and measure business performance. The non-financial evaluation includes customer satisfaction, product production cycle and other non-financial indicators which aims to evaluate the non-financial factors. Considering the non-financial indicators are often difficult to obtain, and it is also hard to quantify, and non-financial factors have strong subjectivity. Hence, in this paper, based on the financial evaluations would include a series of index such as profitability index, solvency indicators and growth ability index.#p#分頁標題#e#

 

(1) Return on Assets, ROA

 

Formula: EBIT/Total asset

 

ROA reflects the efficiency of the using of assets of listed companies and the ability that the company earn profits by using its all assets including net assets and liabilities. Comparing with market interest rates, the company can determine whether enterprises make full use of financial leverage.

 

(2) operating profit ratio(OPR)

 

Formula: profits/ Operating income

 

It is used to measure ability to generate profits. For many companies, purchasing or selling securities or other abnormal operating projects in the securities market will also brings to the enterprise gains and losses, but that does not represent the true profitability of the enterprise, so the article should eliminate these projects on the analysis of profitability. 

 

(3) Operating cost rate (OCR)

 

Formula: Operating costs/ Operating income

 

It reflects the efficiency of input and output of an enterprise. For a business organization, its performance is not only embodied in the concept of the realization of strategic objectives, but also the business process efficiency. Operating cost rate can well reflect the enterprise's ability to control costs, and reveal the profitability of the enterprise. 

 

(4) Rate of return on Common stockholders' equity, ROE

 

Formula: Net profits/ the shareholders'average equity

 

ROE is one of the most representative and most comprehensive index of profitability. It reflects the number of the shareholder return on investment.

 

(5) Main busienss revenue growth (MBRG)

 

Revenue is the core of every company and it is also the main source of profits. But if the company only cares about how much income, then the management is easy to pursuit of immediate interests and ignore the long-term benefits of short-term behavior.

 

(6) Net profit growth rate, NPG

 

Before IPO, it adopts compound growth rate of three years before listing;after IPO, it uses the growth rate of the year of listing and the growth rate after a year of listing

Net profit is also the threshold of listing on the GEM. And the net profit is often the ultimate goal of listed companies. In order to investigate the changes of net income before and after IPO, this paper set up the index of net profit growth which can reflect the enterprise growth and development ability.

 

(7) asset-liability ratio

 

Formula: Liability/ assets 

Asset-liability ratio is a measure of long-term debt paying ability. It reflects how much of the total assets is derived from the shareholders' equity, the higher the capital adequacy ratio, shows that the stronger the solvency. When the index is low,  the enterprise's owned money is high, the debt ratio is low can be considered the safety factor of the debt is high. #p#分頁標題#e#

 

(8) liquidity ratio

 

Formula: current assets/current liability

 

Current ratio can largely reveals enterprise fixed assets to current liabilities solvency and the degree of security. Through the analysis of the index before and after the change, the company can understand the detailed situation of raising money. The higher the ratio, then the enterprise's short-term debt paying ability is stronger.

 

3.4 variable

(1) VC

 

In order to determine whether the listed companies have VC investing, the paper refers to the initial public offerings of Chinese listed companies in the database by setting the shareholders name, rank, shareholder's main business of sample company for data collection. Also, referring to the prospectus of the company to determine whether the top 10 shareholders in the presence are risk investment institutions. The first method is to look at the name of the top ten shareholders in the presence, the word of "investment", "venture capital", "risk investment" are all indicators that the shareholders are VC institutions. For further investigation and judgments, "industrial investment", "equity investment” and “Investment" can prove for it.

 

(2)industry of listed companies

 

Different companies belong to different industries, so the environment faced the industry are also different and their performance is also restricted by the overall level of the industry. It is necessary to control the listed company's industry as variables. The industry of Chinese listed companies is classified according to industry classification guidance of listed companies. The standard code divide industry from A to M13 category. The distribution of 159 sample companies is presented as follow: 

 

Number variable

agriculture, forestry and fishing 4 I1

information and technology 31 I2

social service 7 I3

communication and culture 8 I4

biological medical 17 I5

technology manufacturing #p#分頁標題#e#31 I6

chemical manufacturing 18 I7

nonmetallic mineral manufacturing 7 I8

electron component 29 I9

other manufacturing 7 I10

Table 3: Industry classification of sample companies

 

（Reference:China's listed companies financial indicators analysis database）

 

(3)The concentration of stock equity

 

The first big shareholder stake of listed companies is usually divided by the boundary of 30% in China. Above the 30%, it is known as the "strong equity concentration" while if less than 30%, then it is called "weak equity concentration". If ownership concentration is high, the first major shareholders will actively participate in the management of the company for their own interests. In all sample companies, there are 60% that the first big shareholders hold more than 30%.

 

(4)Financial indicators

 

Financial indicators play an important role in the research. The study would like to find out the impact of VC on profitability changes. So the changes in the operating profit margin is the explained variable, and the total assets profit margins, asset-liability ratio, main business revenue growth are all the control variables.

 

3.5 Regression model

 

The change of operating profit ratio

=α-β0*VC--β0*C-β1*I1-β2*I2-β3*I3-β4*I4-β5*I5-β6*I6-β7*I7-β8*I8-β9*I9-β10*I10-θ1*ROA-θ2*DAR-θ3*MBRG-π1*Y09-π2*Y10-π3*Y11-e

(Reference:______)

 

The change of operating profit ratio is obtained by comparing the average value of the last two years. VC is the dummy variable of venture capital, if the company has the venture capital during its IPO process, then VC=1, otherwise, VC=0.

C means the dummy variable of the shareholders’ proportion that controls the most of the shares. If the first big shareholder holds more than 30%, then C=1, otherwise, C=0.

I1=1 indicates that the company belongs to agriculture, forestry and fishing industry.

I2=1 indicates that the company belongs to information and technology industry

I3=1 indicates that the company belongs to social service industry#p#分頁標題#e#

I4=1 indicates that the company belongs to communication and culture industry

I5=1 indicates that the company belongs to biological medical industry

I6=1 indicates that the company belongs to technology manufacturing industry

I7=1 indicates that the company belongs to chemical manufacturing industry

I8=1 indicates that the company belongs to nonmetallic mineral manufacturing industry

I9=1 indicates that the company belongs to electron component industry

I10=1 indicates that the company belongs to other manufacturing industry

DAR, the solvency indicators, average asset-liability ratio of the first two years.

MBRG, the growth ability index, average growth rate of the company main business for the previous two years.

Y09, Y10 and Y11 means that the year of IPO is 2009, 2010 and 2011 respectively.

 

4.0 Results analysis  結果分析

 

4.1 descriptive statistics

4.1.1 Basic situation

 

At startup, although entrepreneurial firms have professional technical advantages and broad development prospects, they have to face the bottleneck of funds. At this moment, venture capital firm which have the capital strength provide venture capital to the specific enterprise invested company in order to obtain shares and then would like to sell for investment remuneration in the future. Venture capital firms will participate in enterprise management and appropriate select underwriters so as to guide enterprises before IPO. Venture capital market become mature increasingly, the scale of investment also showed a trend of increasing. 

 

Year of IPO Number of companies with VC Number of companies with non-VC total

2009 26 8 34

2010 90 25 115

2011 6 4 10

Table 4: Basic situation of sample companies

It is clear that the companies without VC account for a small number.

(Reference:China's listed companies financial indicators analysis database______)

4.1.2 Change of indicators

 

P/E is concerned mainly for the Venture capital investment. In general, EPS is directly related to the P/E. However, some other indexes are selected to represent the profitability in this paper. Because in the early stage of IPO, the company may split the stock usually, EPS will not be so accurate.#p#分頁標題#e#

 

(1) ROE analysis

2 years before IPO 1 year before IPO during IPO 1 year after IPO

Mean 0.4076 0.3508 0.117 0.0768

Median 0.3371 0.3283 0.1132 0.7628

standard deviation

0.2168 0.1381 0.0357 0.0364

minimal value

0.1465 0.0821 0.0252 -0.0009

maximal value

1.4101 0.8179 0.2593 0.2152

Table 5: ROE change analysis

 

(2) ROA analysis

2 years before IPO 1 year before IPO during IPO 1 year after IPO

Mean 0.1761 0.1789 0.0963 0.0662

Median 0.1617 0.1643 0.0954 0.0638

standard deviation

0.0881 0.0801 0.033 0.033

minimal value

0.0437 0.0412 0.0161 #p#分頁標題#e#-0.0008

maximal value

0.5376 0.4471 0.2373 0.2012

Table 6: ROA change analysis

 

(3) operating profit ratio

 

2 years before IPO 1 year before IPO during IPO 1 year after IPO

Mean 0.2300 0.2472 0.2230 0.1950 

Median 0.2089 0.2223 0.2029 0.1706 

standard deviation

0.1249 0.1171 0.1159 0.1245 

minimal value

0.0335 0.0427 0.0257 0.0098 

maximal value

0.7342 0.6414 0.5825 0.6095 

Table 6: operating profit ratio change analysis

 

 

(4) Operating cost rate

2 years before IPO 1 year before IPO during IPO 1 year after IPO

Mean 0.5827 0.5645 0.5677 0.5943 

Median 0.6191 0.5870 0.5934 0.6345 

standard deviation#p#分頁標題#e#

0.1895 0.1846 0.1899 0.1894 

minimal value

0.0825 0.0758 0.0613 0.0521 

maximal value

0.8917 0.8648 0.9046 0.0943 

Table 7: operating cost rate change analysis

(Reference:China's listed companies financial indicators analysis database_________)

 

From the change between a year before IPO and two years before IPO, the ROE continues to decline, in particular, the decline is visible during its period of IPO. This has to be related with the phenomena that many listed companies buy into shares immediately, but there was no increase in the net profit. ROA and operating profit margin all rise in the intervals between the previous two years and one year before IPO while the operating cost rate drop. According to the analysis, the reason may be due to many listed companies conduct the earnings management for the performance of the year before IPO to whitewash its growth and to raise more capital. Due to the CSRC provisions, the financial information of the first two years and a year before IPO should be closed to the public before in the GEM listed company's prospectus, if the previous year's performance can satisfy the masses of investors, then it is possible to raise a large number of money, and it also provides guarantee for the safety of the venture capital.

 

4.1.3 The effect of IPO on the profitability of companies

Before IPO After IPO change

VC non-VC VC non-VC VC non-VC

ROE 36.74 42.01 9.46 10.5 -27.28 -31.51

ROA #p#分頁標題#e#17.1 19.97 7.84 9.12 -9.26 -10.85

Operating profit rate 24.25 22.55 20.66 21.75 -3.59 -0.8

Operating cost rate 57.31 57.54 58.57 56.47 1.26 -1.07

Table 8: The change of the avarage number before and after IPO

(Reference:China's listed companies financial indicators analysis database_________)

 

Either before or after an IPO, the average number of ROA and ROE of the listed companies that has VC are lower than the company without VC, but it is not difficult to explain, because companies with VC have a big injection of venture capital and thereby increasing the number of net assets or the total assets, so the ratio will be low. And the presence of venture capital will directly affect the calculation of ROA and ROE, so the absolute low value does not mean that company with VC is better than companies without VC.

 

Since the ROE and ROA cannot reflect its real profitability, operating profit margin will play an important role in the measure of profitability. Although operating profit margin all showed a trend of decline for both companies with or without VC after IPO, operating profit of companies with VC is higher than before IPO, on the other hand, the profit rate is obviously lower than the company without VC after IPO. That is to say,  the listed company with VC has better profitability before IPO, but will have a huge slump after IPO. Sometimes it may has worse performance than companies without VC. The reason may be because the listed holding company would like to whitewash its operating margins, which are more likely to raise more money.

 

4.2 significance testing

 

In order to confirm the intuitive judgment made before, index changes before and after IPO should be tested. For a company with VC and without VC, they are divided into two groups, the mean value before IPO and the mean value after IPO respectively. And each profitability index will have paired sample test.#p#分頁標題#e#

before IPO after IPO change T P

With VC 0.3674 0.0946 0.2728 20.0840 0.0000 

Without VC 0.4201 0.1050 0.1612 11.8940 0.0000 

Table 9: paired sample test of ROE

 

before IPO

after IPO

change

T

P

With VC 0.1710 0.0784 0.0926 15.3010 0.0000 

Without VC 0.1997 0.0912 0.1085 10.8440 0.0000 

Table 10: paired sample test of ROA

 

before IPO after IPO change T P

With VC 0.2425 0.2066 0.0359 5.4340 0.0000 

Without VC 0.2255 0.2175 #p#分頁標題#e# 0.0080 0.7780 0.4420 

Table 11: paired sample test of operating profit rate

 

before IPO after IPO change T P

With VC 0.5731 0.5857 -0.0126 -2.3940 0.0180 

Without VC 0.0575 0.5647 0.0107 0.9660 0.3410 

Table 12: paired sample test of operating cost rate

 

It is obvious that the changes of ROA and ROE before and after IPO are significant. However, the changes of another two index are not so significant according to the P value, which are 0.442 and 0.341 respectively.

(Reference:China's listed companies financial indicators analysis database________)

 

4.3 regression analysis

According to the T-test before, the change of ROA and ROE before and after IPO are significant. In order to have further examination, the regression analysis will be conducted. 

coefficient t p

VC -0.1900 -2.5800 0.0110 

I5 0.1790 2.3910 0.0180 

I9 0.2650 3.5330 0.0010 

Y10 -0.1700 2.2850 0.0240 #p#分頁標題#e#

DAR 0.2810 3.8660 0.0000 

MBRG -0.1260 -1.7350 0.0850 

Adjusted R 0.1860 

F 7.0130 

Table13: Regression results

 

(Reference:China's listed companies financial indicators analysis database_______)

So, the original hypothesis is not suitable in the model, the alternative hypothesis is accepted. That venture capital has negative effect on the financial situation before and after IPO.

 

 

5.0 Conclusion and suggestions

 

The paper takes examples from the past study about the change of financial situations before the IPO and after IPO. In addition, the paper focuses on the emerging market and analyzes it through descriptive statistics, significance analysis, comparative research and then build up a regression equation, and finally find out the effect of venture capital influence on IPO performance and draw the following conclusions and interpretations:

 

(1) The overall effect of listed company in GEM

 

From the point of view of profitability, the ROA, operating profit margin, operating cost rate reach the optimum in a year before the IPO while there are significant deterioration trends a year after IPO; ROE presents the declining tendency and decreased significantly, which suggested that VC did not bring benefits to the performance of listed company in GEM, on the contrary, it has helped to drive performance decline. The ability of earning revenue, cost management are back. So, the effect is highlighted in terms of profitability.

Because prior to the IPO, the company should announce the first two years financial statements before IPO, this is the most direct way for investor to command the firsthand information about the listed company before IPO. In order to get the favour of investors and to raise funds, listed companies are inclined to have earnings management before IPO, some costs which should be included in the current year will be deferred to the year after the IPO. So the company intended to be in good condition, and strong position of earning profits . In that year, the rate of operating cost has no change, but ROA, ROE and operating profit rate have deteriorated markedly, this shows under the condition of that the company cost management has no change, the net profits decreased a lot, this may be evidence that the company has carried on the earnings management.#p#分頁標題#e#

 

(2) Companies with VC are more inclined to conduct earnings management before IPO

 

Listed companies with venture capital support has higher value of operating profit margin and ROE than those do not have venture capital support before the IPO, but in the following years, the index fell behind, what is more, it is an extremely significant reduction. At the same time, for the companies that has venture capital support, its operating cost rate is rising after the IPO, and the main business revenue growth changes of both groups of companies are almost unanimously. That indicate  many listed companies conducted earnings management on the performance before IPO and reasonable deferred expenses after the IPO, which gets the impression of "high profitability, high growth" before IPO. They aim to get the favour of investors, so that the stock price rises, and the exit of venture capital will gain excess return. But it also caused a sharp drop in performance after the IPO.

 

(3) The financial situation of the companies with VC declines more after the IPO

 

Though, either before the IPO or after the IPO, company with VC background has lower ROA and ROE. But this is caused by the injection of venture capital which are calculated with the increase of base, so that the injection ratio is less than company without the support of venture capital. So the ROA and ROE does not represent the true profit enterprise level changes. The paper should adopt the operating profit margin and operating cost rate to have comprehensive considerations. Through the analysis, the operating profit margin of companies with VC is greater than that of no VC background, and there is also a significant difference of the ability of earning profits between the period before IPO and after IPO for the companies which have the venture capital support. At the same time, the operating cost rate of the companies with VC investment background rise after the IPO while there is decline of the company without VC. It shows that the cost control ability of the companies with VC is weaker than the company that has no VC investment background.

 

(4) Venture capital has not bring growth ability to listed companies

For the company with venture capital support, its main business revenue growth appeared same change with the companies without the support of venture capital after the IPO. This phenomenon indicates that the venture capital does not bring the positive effect for the growths and developments of the companies. In addition, the situation is the same as the companies without venture capital support. Moreover, the growth rate of ROE is even smaller than the companies without venture capital support. So the venture capital in China pays less attention on the operation management, products and service. Most of them focus on how to make the financial statements present positive signals to the investors. Then, the investment institution can earn extra profits when they exit.#p#分頁標題#e#

 

Hence, we can get the conclusion as follows.

 

First of all, the GEM market is supposed to act as the engine of venture capital and use listing conditions to be an important standard of selecting company, thereby leading capital flows to emerging industries which has more demand. At the same time, the GEM needs to provide unimpeded withdrawal mechanism for venture capital, thus further to guide venture capital into the new enterprise.

 

Second, the government should combine risk investment and the sponsor system and establish the credit system of venture capital. To strengthen the constraint of risk investment institutions, the GEM market should improve the quality of information disclosure and prevent the pursuit of short-term interests and engage in earnings management.

 

Thirdly, the GEM market should expand the source of venture capital. At present, the main body of venture investment in China comes from the state-owned capital and private capital. Compared with other capital market, venture investment funds in China has single subject and has small scale, so the investment ability is limited. 

 

 

Appendix 1: 

Comparison of operating results before and after IPO

Index Item of Index Description

Profitability Index Return on Assets,ROA EBIT/Total asset

　 Rate of return on Common stockholders' equity, ROE Net profits/ the shareholders'average equity

　 Total Assets Growth Rate, TAG Before IPI, it adopts compound growth rate of three years before listing;after IPO, it uses the growth rate of the year of listing and the growth rate after a year of listing

Growth Index Main busienss revenue growth Before IPI, it adopts compound growth rate of three years before listing;after IPO, it uses the growth rate of the year of listing and the growth rate after a year of listing

　 Main business profit growth rate, MPG Before IPI, it adopts compound growth rate of three years before listing;after IPO, it uses the growth rate of the year of listing and the growth rate after a year of listing

　#p#分頁標題#e# Net profit growth rate, NPG Before IPI, it adopts compound growth rate of three years before listing;after IPO, it uses the growth rate of the year of listing and the growth rate after a year of listing

 

Adapted from (Jain. B, Kini, O, 1994). The Post-issue operating performance of IPO firms. Managerial and Decision Economics; (Franklin, A. 1989). Signaling by underpricing in the IPO market. Journal of Financial Economics, 

 

Appendix 2: 

Comparison of operating results before and after IPO

Index Computing formula Description

Price-Earning ratio(P/E) Market price per equity share/  Earnings per share Price earning ratio reflects investor expectations for the future growth of a company aiming to be listed

Price to book ratio (P/B) Stock price/ Book value per share P/B reflects the value that market participants attach to a company's equity relative to its book value of equity.

IPO underpricing rate The percentage change from the IPO offering price and the price at the end of the first day of trading Higher underpricing indicates more seriously undervalued share price in IPO

Issurance costs per share Total costs for issuring / number of shares issued VC can helo with reducing costs for stock issurance

Allocation rate Amount of money raised/ amount of money involved in subscription Lower rate indicated there is more money involved in the case

Underwriter's reputation The market share of amount of underwrting prices of underwriters measures the quality of underwriters Higher quality underwriters will attract higher quality partners

Capital Structure The proportion of share capital that institutional investors have Higher proportion of share capital possession shows higher qualty partners attracted by VC