Last Minute Deals: Rent Seeking in IPO Market

This　paper　explores　rent-seeking　behavior　in　a　heavily　regulated　equity-financing　market.　Using　manually-collected　information　about　ownership　changes　from　China’s　IPO　application　filings　for　the　Growth　Enterprise　Market　(GEM),　we　find　that　over　a　third　of　firms　receive　late-stage　private　equity　investment　and　subsequently　halve　rejection　rates　for　IPO　applications,　compared　to　firms　without　PE　investment.　The　PE　investors　help　firms　pass　the　regulatory　barriers,　especially　for　those　with　weaker　quality,　and　are　rewarded　with　9.5　times　return　over　a　14-month　period　for　an　average　deal.　We　also　examine　alternative　explanations　for　extraordinary　PE　returns,　such　as　financing,　selection/certification,　and　managerial　involvement,　and　find　rent-seeking　is　the　most　coherent　explanation　to　our　findings