FINANCIAL ECONOMICS | RESEARCH ARTICLE Do initial reserves signal long-term IPO stock performance?

1 * Abstract: This research examines the long-run Initial Public Offerings (IPO) stock performance of a large Chinese sample, and in particular the relationship between initial reserves (capital reserves and revenue reserves immediately after the IPO) and long-run IPO stock performance. In general, Chinese IPOs do not underperform the market/industry benchmarks, but they significantly underperform their size- matched industry peers. More importantly, Chinese IPO firms tend to issue a large amount of bonus shares (also called as a 'capitalization issue', i.e. capitalization of the reserves) after the IPO. Consistent with bonus share signaling hypothesis, Chinese IPO firms exhibit increased operating/stock performance subsequent to bonus issues. Interestingly, the size of the initial reserves is positively associated with long-run IPO stock performance. This research adds another piece of empirical evidence to the literature whether IPOs underperform in the long run, by confirm- ing that the choice of performance measures and benchmarks could affect the conclusion on the IPO long-run performance. Further, it discovers that size of initial reserves could signal superior IPO stock performance in the long run.