Entrepreneurial finance meets government investment at initial public offering: The role of minority state ownership

Abstract

Manuscript Type Empirical Research Question/Issue Prior studies on the role of state investment tend to focus on either majority state ownership or aggregating majority and minority state ownership. Drawing upon signaling theory, we theorize that the negative intent signaled by minority state ownership reduces initial public offering (IPO) market performance. In addition, we hypothesize that founders as chief executive officers and outside directors not from state‐owned enterprises, representing the positive signal of intent, can attenuate the negative effect of minority state ownership. Research Findings/Insights The empirical results, based on 274 small and private firms in China's newly launched stock market, provide support for the hypotheses based on price premium, first‐day turnover rate, first‐day price increase, underpricing, and Tobin's Q. Theoretical/Academic Implications To the best of our knowledge, this is the first study to examine how minority state ownership affects small and private firm IPO performance. It suggests new avenues of research on ownership structure and the principal‐principal problem in the corporate governance of emerging economies. This study reveals the distinctive nature and effect between controlling state ownership and minority state ownership. The current research also opens new avenues of research on applying signaling theory, signal of intent in particular, in an IPO study. Practitioner/Policy Implications This study reveals the negative intent signaled by minority state ownership in privately controlled firms at IPO due to the weak monitoring capacity, limited resource provision, and enhanced political interdependency between private controllers and minority state owners. As minority state ownership becomes a more salient phenomenon in emerging markets, it guides policy makers in governance choices for government‐funded firms.

On the social and conceptual structure of the 50-year research landscape in entrepreneurial finance

“…The knowledge within the domain is developing, but its interaction with other domains is limited, making the domain knowledge narrow. Studies in this domain usually pay attention to IPO underpricing and information asymmetry (Fitza and Dean 2016 ; Pollock et al 2015 ; Wang et al 2018 ).…”

Initial public offering valuation and prior shared experience in the boardroom of threshold ventures: A study of industry effects

“…Sixth, we accounted for the equity retention measured by the proportion of the IPO firm's stock being retained by insiders. The retained share ownership by insiders may positively affect investors' perceptions of the IPO value (Chahine et al, ; Wang et al, ). The higher the level of equity retained, the greater the insider's perception of longer term firm success (Daily et al, ) and project quality (Vismara, ) and thereby reducing the level of uncertainty of how potential investors value the firm.…”

“…Fourth, given the specific characteristics of a European unregulated investment market such as AIM, we controlled for the reputation of the nominated adviser calculated as the percentage of the gross proceeds raised by the advisor nominated in the entire market during 2 years before the IPO took place. 1 Having access to high-quality advice may serve as a signal of the firm's legitimacy and potential, thereby reducing investors' uncertainty (Wang, Jiao, Xu, & Yang, 2018;Wang & Song, 2016) and leading to high perceived IPO value (Bell, Filatotchev, & Aguilera, 2014;Moore et al, 2010). Fifth, we controlled for venture capital funding 2 using a dummy variable that takes the value of 1 if the company had received venture capital financing prior to the IPO and 0 otherwise (Chahine & Goergen, 2013, 2014Chahine & Saade, 2011).…”

The effect of ownership on sustainable development and environmental policy in urban waste management: An explicatory empirical analysis of Italian municipal corporations

“…Both public and private entities can invest in MOCs, so they can be described as mixed companies (Hodge & Greve, 2007) incorporating features of both the public and private sector (Musacchio & Lazzarini, 2014). Although municipal shareholders put for example more emphasis on policy‐related tasks, on maintaining social security, reducing unemployment rates, and keeping control of sensitive industries (Wang, Jiao, Xu, & Yang, 2018), private ones pay more attention to their own interests and tend to prefer inputs that can bring higher returns (Li et al, 2020). MOCs can be owned by multiple municipalities or shared by the public and private sectors despite the existence of local bureaucracies (Cruz & Marques, 2013), this way generating advantages and synergies arising from the interaction among different public and public–private elements (Bovaird, 2004).…”