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.