“Late-Stage Private Equity Investment as a Non-Market Strategy: Evidence from Chinese pre-IPO Firms” by Dr. Yu Zhang
Dr. Yu Zhang
Assistant Professor of Management
China Europe International Business School
This paper explores the use of late-stage private equity investments by pre-IPO firms as a non-market strategy. We argue that in a heavily regulated equity-financing market, late-stage private equity investors can help pre-IPO firms to pass the regulatory barriers, especially for those with weaker quality. However, such use of non-market strategy is not free, as private equity investors may ask for a rent for such favor. Using manually-collected information about ownership changes from China’s IPO application filings, 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. Those PE investors are then rewarded with 9.5 times return over a 14-month period for an average deal. Further tests rule out possible alternative explanations for extraordinary PE returns, such as financing, selection/certification, and managerial improvement.