IPO location as a quality signal: the case of Chinese developers

Abstract

A growing number of Mainland Chinese real estate firms went public over the past decade. Some floated their shares in Hong Kong, while others were listed on Mainland China stock exchanges. This paper empirically examines the determinants of their initial public offering (IPO) location choice. Based on probit analysis, we found that developers with better unobserved quality are more likely to list in Hong Kong than in the Mainland. State ownership, gearing ratio, and property market performance are other significant determinants of IPO locations. A further test shows that the degree of IPO underpricing is larger for firms listed in Mainland China than those listed in Hong Kong. All these findings are consistent with the signaling hypothesis—good firms signal their quality to investors by listing in market with more stringent regulatory environment where other firms cannot afford to imitate.