IPO Restriction, Moral Hazard And Firm Performance

To prevent management and business operation risks arising from frequent changes of the management team, A-share market introduced the restricted securities rule so as to maintain the stability of the corporate governance structure and management after the reform of the shareholder structure in listed companies basically completed in2006, making the shares held by primary shareholder and practical controller subject to a3years lock-up period.Studies on foreign capital markets find that restrictions or lockups usually serve as a commitment device to alleviate moral hazard, the greater potential for moral hazard the longer lockup. However, the lockup periods in foreign markets are often between12and18months, less than half of that in A-share market. Then, is this more strict restriction rule uniformly regulated by authority a more effective solution to the problem of moral hazard in newly public firms?While improvement of corporate governance due to the restriction rule will help enhance firm performance, Market overreaction in lockup period may be an important motivation of earnings management. So, whether the implementation of the IPO restriction rules has exactly helped improve the performance of newly public firms or just has been another motivation of earnings management? And the nature of ownership must be taken into account to answer the above question.Using a sample of newly public firms from2006to2008in A-share market, this paper investigates the influence of the IPO restriction rule in China capital market on company behavior and performance. The results indicate that:1) the IPO restriction rule has different impacts on company behavior and performance due to their nature of ownership. During the IPO restricted stock trade period, both ROA(Return On Assets) and DA (Discretionary Accrual) of state-owned enterprises show no significant change from that after restricted stock trade period. But Non-state-owned Enterprises in the IPO restricted stock trade period make higher ROA&DA, which may be the consequence of earnings management. The results of this paper not only enrich the literature about the role of lockup, but also provide empirical evidence for policy makers.This paper is organized as follows. Section I is an introduction, relate the background, motivation, and method. Section II introduces the restricted securities rules in China and abroad IPO market and relevant theories. Section III presents literatures review and the development of hypotheses. Section IV describes the sample selection procedure, the variables design and the regression model. Section V presents results from our empirical tests and analysis of these results, and Section VI concludes the paper.