Effects of Venture Capital, R&D, and Technology on IPO Underpricing: Evidence from China

Abstract

Research Question: This study is a preliminary attempt to investigate the effects of technology and R&D expenditure and the moderating effect of venture capital through the interaction of technology and R&D on the underpricing of IPOs in China’s A-share market. Motivation: The role of technology in IPO underpricing and the moderating influence of venture capital, R&D, and technology on underpricing of IPO have not been studied; thus, this research aims to fill this gap. Idea: High-tech firms experience higher IPO underpricing. Venture capital can help to reduce the high-technology IPOs’ underpricing by reducing the uncertainty associated with tech-IPOs. IPOs with higher R&D expenditure experience higher IPO underpricing. Venture capital can help release the uncertainty faced by IPOs with high R&D and reduce the underpricing of such IPOs. Data: The data represent all IPOs in China’s Ashare market from SSE and SZSE for the 2013–2018 period. Our sample includes a total of 997 IPOs, excluding financial company IPOs and IPOs without integrated data. Method/Tools: We apply a cross-product residual centering approach to explore the relationships among factors. Findings: We find that venture-backing IPOs experience less underpricing, technology requirement increases IPO underpricing, and R&D expenditure helps to reduce tech-IPO underpricing. The striking observation that has emerged from the data is that IPO underpricing caused by technology requirement can be moderated by the participation of venture capital. The finding highlights that strengthening the supervision role of venture capital in the invested company and improving the R&D information disclosure level in a technology company can effectively reduce the degree of IPO underpricing. Contributions: Our research focuses on all IPOs from China’s A-share market, indicating an expanded sample size. More importantly, this study offers new insights by illustrating the interaction effect between R&D and technology on IPO underpricing as a means of explaining the moderation influence of venture capitalists on IPO underpricing