.

Pacific-Basin Finance Journal 9 2001 101117

www.elsevier.comrlocatereconbase
Investment bank reputation and relaxed listing
requirements: Evidence from infrastructure firm
IPOs in Hong Kong
Kathryn L. Dewenter
a,)
, Laura Casares Field
b
a
Department of Finance, Uniersity of Washington, Box 353200, Seattle, WA 98125, USA
b
Penn State Uniersity, Uniersity Park, PA, USA
Abstract
In early 1996, the Stock Exchange of Hong Kong allowed firms focusing on infrastruc-
.
ture projects to issue initial public offerings IPOs under a relaxed set of listing require-
ments, allowing these firms to go public with a shorter history or lower profitability levels.
We provide evidence that these firms are no more speculative than firms listing under the
regular requirements. To the contrary, we find that firms listed under the relaxed require-
ments are taken public by reputable investment banks and that these firms have character-
istics that otherwise mitigate their lack of earnings history. These patterns are consistent
with investment banks avoiding highly speculative issues to protect their reputations.
q2001 Elsevier Science B.V. All rights reserved.
JEL classification: G15; G24
.
Keywords: Initial public offerings IPOs ; Hong Kong; Infrastructure finance; Investment bank;
Relaxed listing requirements
1. Motivation
The need for funds to develop infrastructure in emerging markets is huge and
growing. For example, the World Bank estimates that Latin America and the
Caribbean currently need to invest 4.5% of GDP each year on power, transport,
)
Corresponding author. Tel.: q1-206-685-7893; fax: q1-206-685-9392.
.
E-mail address: dewe@u.washington.edu K.L. Dewenter .
0927-538Xr01r$ - see front matter q 2001 Elsevier Science B.V. All rights reserved.
.
PII: S0927- 538X 01 00006- 3
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 102
telecoms, sewage, and water supply upgrades.
1
These funding requirements are far
beyond what multilateral agencies and federal governments can provide. There-
fore, emerging market countries have had to turn to private sources to help finance
these projects.
To date, private equity funds have been the primary vehicle for infrastructure
investments. Market participants, though, argue that public funds, via stock market
listings, are needed to both expand the pool of available money and to provide an
exit strategy for the initial private investors. Several countries, recognizing the
need for public funds and the short lives of most infrastructure firms, have
developed relaxed listing requirements for infrastructure firm initial public offer-
.
ings IPOs . Hong Kong, Malaysia, and Singapore, for example, all announced
plans to establish relaxed listing requirements for infrastructure firms in late
1995.
2
By relaxing the requirements on trading record period and profit levels, Hong
.
Kongs relaxed listing requirements, called sub-rule 8.05 2 , allow infrastructure
.
project companies to list on the Stock Exchange of Hong Kong SEHK at an
earlier stage of their lives. Before the stock exchange implemented the relaxed
rules, all firms had to meet the basic, or regular, listing criteria. Among these
rules, the SEHK requires that, AA new applicant must normally have a trading
record of not less than 3 years under substantially the same management. The
profit attributable to shareholders must, for the most recent year, be not less than
HK$20 million and, for the 2 preceding years, be in aggregate not less than
HK$30 million.B
3
Under the relaxed rules for infrastructure project companies,
firms are allowed to issue an IPO even if they have fewer than 3 years of audited
financial statements andror lower profit levels than the formal thresholds.
Since implementation of the special rules for infrastructure project companies,
infrastructure firms can choose whether to issue stock on the exchange early in
their lives by listing under the relaxed requirements, or, alternatively, to wait until
they are more seasoned and list under the regular requirements. One might ask
how investors react to stock issues by firms under the relaxed rules. Are the
relaxed listing firms considered more risky or speculative than comparable regular
listing firms? Or, do the investment banks, concerned about their reputations, only
sponsor those firms that somehow compensate for the lack of a comparable
earnings history?
This paper provides evidence on Hong Kongs experience to date with relaxed
listing requirements for infrastructure firm IPOs. We study infrastructure listings
1
.
Economist, APrivacy please: Infrastructure in Latin AmericaB July 27, 1996 5455.
2
In the late 1990s, listing requirements in several exchanges were also lowered for internet firms
.
for example, Mothers in Japan .
3
ATrading recordB refers to years of operation. This quote is from the SEHK
website,www.sehk.com.hk. Throughout the 1990s, the Hong Kong dollar was pegged at HK$7.8 per
$US1.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 103
made on the Hong Kong exchange during 1996 and the first half of 1997 to
examine whether there are any noticeable differences in those firms issuing IPOs
under the regular listing requirements vs. those issuing IPOs under the relaxed
listing requirements.
4
We look at the characteristics of the offerings to see if there
is any evidence that the IPOs issued under the relaxed requirements are more
speculative than the regular requirement listings. We examine how the relaxed
offerings were received by investors compared to infrastructure offerings issued
under the regular guidelines, and at the post-IPO stock-price reaction to accounting
performance announcements. Since our post-IPO period includes the Asian finan-
cial crisis, we are also able to compare how the two groups fared during
extraordinarily poor economic times. Finally, we look to see whether the relaxed
listing firms have characteristics that otherwise mitigate their lack of earnings
history.
.
We begin with the population of i all infrastructure firms issuing IPOs on the
.
Hong Kong Stock Exchange under sub-rule 8.05 2 from January 1996 through
.
1997, and ii all infrastructure firms issuing under the regular listing requirements
over the same period. During this time, there were four relaxed and 13 regular
listing infrastructure firms. Three of the relaxed listing firms focused exclusively
on road projects in China, one focused on port development. The regular listing
. . .
firms focused on railroads 1 , power stations 1 , telecoms or satellites 3 , roads
. .
in China 4 , or were diversified across infrastructure projects 4 . Since we knew
we were going to have a small sample, no matter what criteria we used, we
decided to construct the cleanest possible set of matching firms. As a result, we
restrict our analysis to the seven firms that focused exclusively on road projects in
China.

Three of the relaxed listing firms fit this criterion. One firm, Road King IPO
.
issue date: July 4, 1996 , was forced to use the relaxed requirements because it
had earned negative net profits within the previous 3 years, and two firms, GZI
. .
Transport January 30, 1997 and Jiangsu Expressway June 27, 1997 , had been
in business less than 3 years. The four regular listing firms are: Anhui Expressway
. .
November 13, 1996 , Shenzhen Expressway March 12, 1997 , Zhejiang Express-
. .
way May 15, 1997 , and Sichuan Expressway October 7, 1997 . A more
complete description of all seven firms is provided in Appendix A.
While this sample is small, it does provide two sets of firms with very similar
profiles. It allows us an early comparison of the listing and subsequent stock price
performance of the relaxed vs. regular requirement firms. We find no evidence of
any striking differences consistent with the relaxed listing firms being relatively
more risky or speculative than the regular listing firms. Instead, we find evidence
that the relaxed listing firms were, in some respects, actually less speculative than
4
Given the recent market turmoil in Asia, no firms issued IPOs under sub-rule 8.05 from June 30,
1997 through June 30, 1999.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 104
the regular listing firms. Indeed, well-known, reputable investment banks under-
wrote the relaxed as well as the regular listing firms. Moreover, prior to the IPO
issue, the relaxed listing firms were larger or more profitable than the regular
listing firms despite the fact that they did not meet the regular listing requirements.
All of this evidence is consistent with investment bankers avoiding highly
speculative issues to protect their reputations.
Below, Section 2 discusses the empirical evidence. In the conclusion, Section 3,
we discuss whether or not the findings of this small sample can be generalized.
2. Empirical evidence
This section compares the relaxed and regular listing firms along several
different dimensions. Unless otherwise noted, the data on the issues come from the
prospectuses or press reports, while the stock price data come from Datastream
International.
2.1. IPO structure
Table 1 provides descriptive data on the IPOs for the three firms using the
relaxed rules as well as the four firms listing under the regular rules. The bottom
row of the table provides the difference in the averages for the relaxed vs. regular
firms. The results of a non-parametric Wilcoxon rank test for differences in the
averages are reported in the table. The difference is never statistically significant
.
5
using a t-test with pooled variances results not reported in the table .
Column 1 provides the first trading date. These IPOs occurred between July
1996 and October 1997.
Column 2 provides the offer price. The two groups seem to have substantially
different offer prices with an average of HK$4.91 for firms under the relaxed rules
and HK$1.98 for firms under the regular rules. Indeed, the offer price ranges from
HK$3.11 to HK$8.40 for firms under the relaxed rules, while it is only HK$1.55
2.38 for the regular listing firms. Over 19961997, the mean offer price across all
SEHK IPOs was HK$3.06, with a range of HK$1.0019.80.
6
A Wilcoxon rank
test rejects that the two sets of prices for these infrastructure firm IPOs come from
5
Note both the t-test and the rank sum test assume independence.
6
.
According to Angel 1997 , the median US stock price is about US$40.00, while a typical Hong
Kong share sells for about US$2.00. Angel argues that differences in average stock prices across
countries are at least partly due to different rules on tick sizes. While the US uses a single absolute tick
size that applies to most stocks, AHong Kong has the most extreme version of a step function, with 10
.
different tick sizes in its rule book.B p. 658 .
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Table 1
Background on infrastructure firm IPO issues
First trading Offer price Funds raised Fraction sold International tranche Subscription rate
. . . . .
date HK$ HK$ million % % times
1 2 3 4 5 6
Relaxed rules firms
Road King 7r4r1996 8.40 1180.5 26.0 85.0 2.1
GZI Transport 1r30r1997 3.23 928.6 25.0 75.0 528.4
Jiangsu Expresswayy 6r27r1997 3.11 3800.4 25.0 61.0 2.4
Average 4.91 1969.8 25.3 73.6 177.63
Regular rules firms
Anhui Expressway 11r13r1996 1.77 872.6 35.0 85.0 1.0
Shenzhen Expressway 3r12r1997 2.20 1644.5 33.9 90.0 36.6
Zhejiang Expressway 5r15r1997 2.38 3412.5 30.0 90.0 118.0
Sichuan Expressway 10r7r1997 1.55 1387.7 35.0 65.0 1.7
Average 1.98 1829.3 33.5 82.5 39.33
a a
( )
Difference relaxedIregular 2.94 140.5 y8.2 y8.9 138.3
.
The sample consists of all infrastructure finance firms focused exclusively on road projects in China which issued an initial public offering IPO of equity on
the Hong Kong Stock Exchange during the period of July 1996 through October 1997. Column 1 provides the offering dates. Column 2 provides the offering
prices, in Hong Kong dollars. Column 3 provides the Hong Kong dollars raised in the offering, in millions. Column 4 provides the fraction sold in the offering,
measured as the ratio of shares sold to total shares outstanding after the IPO. Column 5 provides the fraction of the offering sold abroad. Column 6 provides
the subscription rate, which is measured as the number of shares requested from underwriters divided by the number of shares offered. During 19961997, the
US DollarrHK Dollar exchange rate was approximately 1:7.8.
a
Indicates significant difference in a non-parametric Wilcoxon rank test at the 5% level.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 106
the same sample at the 5% level. Thus, we find that the relaxed firms have
relatively higher offer prices than the regular firms. In the US, Seguin and
.
Smoller 1997 show that more speculative IPO offers tend to have lower offer
prices.
Despite the apparent difference in offer price, the averages of the funds raised
.
column 3 across the two groups are substantially similar: HK$1970 million for
firms listing under the relaxed rules, compared to HK$1829 million for firms
listing under the regular rules. Looking at the firms individually, there appear to be
no major differences in the funds raised across the two groups.
Firms listing under the relaxed rules sold an average of 25% of the firm in the

IPO, compared with 33% for firms listing under the regular requirements column
.
4 . In fact, all three firms listing under the relaxed requirements offered between
25% and 26%, while all four firms listing under the regular rules issued at least
30%, with two offering 35% of the firm to the public. A Wilcoxon rank test rejects
that these two sets of numbers come from the same sample at the 5% level,
providing evidence that the relaxed firms offered a smaller portion of their firms
than did the regular listing firms. In the signaling model of Leland and Pyle
.
1977 , the fraction of equity retained by an entrepreneur upon taking his firm
public signals firm value. A lower retained portion signals lower quality. Leland
.
and Pyle 1977 would thus interpret the pattern in column 5 as evidence of
relatively higher firm value for the relaxed listing firms.
7
The fraction of the offer sold outside of Hong Kong, in column 5, seems to be
fairly similar across the two groups, with an average 74% for firms listing under
the relaxed rules compared to 83% for firms listing under the regular rules. The
range for firms under the relaxed rules is 6185%, while for firms under the
regular rules the range is 6590%. In other words, all of these IPOs have a large
international tranche.
The final column in Table 1 provides the subscription rate. GZI Transport
.
listed under the relaxed rules was severely oversubscribed with a subscription

rate of 528 times, as were Shenzhen Expressway and Zhejiang Expressway both
.
listed under the regular rules at 37 times and 118 times, respectively. Over
19961997, the average subscription rate across all SEHK IPOs was 102, with a
.
range of 0.661276. The average subscription rate for firms listing under the
7
. .
In a generalization of Leland and Pyle 1977 , Grinblatt and Hwang 1989 provide a model in
which both the mean and variance of future cash flows are unknown to investors. In contrast to Leland
and Pyle, in the Grinblatt and Hwang model the issuers fractional holding alone is insufficient to
.
signal firm value. Grinblatt and Hwang argue that two signals are required: i the fraction of shares
.
retained by the entrepreneur, and ii the degree of underpricing. Thus, our finding of a significantly
larger proportion retained for relaxed rules firms is consistent with these firms being of higher quality,
as in the Grinblatt and Hwang model. However, as shown below in column 1 of Table 2, we do not
find a significant difference in underpricing for firms listing under the relaxed vs. regular rules.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 107
relaxed rules is 178 times, far more than the subscription rate of 39 times for firms
listing under the regular rules. The difference, however, is driven exclusively by
GZI Transports huge subscription rate and is not significant.
In sum, Table 1 does not provide much evidence of differences in the offerings
of the relaxed listings vs. the regular listings. The offer characteristics are quite
similar across the two sets of firms. The only evidence we do have of differences,
that the relaxed firms had higher offer prices and offered a smaller portion of their
firms, is inconsistent with these firms being more speculative than firms issuing
under the regular requirements.
2.2. Short-run stock price moements
Table 2 provides data on short-run stock price movements after the IPO. All
numbers are expressed as percentages. Column 1 provides the 1-day initial return
after the IPO issue. The initial return is defined as the percentage change from the
fixed IPO offer price to the closing price on the first day of trading.
Column 1 in Table 2 shows that on average, firms issuing under the relaxed
requirements earned a 10.39% initial return, but only one firm, GZI Transport,
.
earned a positive initial return 51% . The other two firms listing under the relaxed
rules earned negative initial returns, with Road King earning y8.33% and Jiangsu
Expressway earning y11.57%. On average, firms listing under the regular rules
earned a very small initial return of only 0.37%, but again there was considerable
variation across firms. Two firms earned positive initial returns, Shenzhen Ex-
pressway with 25.90% and Zhejiang Expressway with 5.04%, while two earned
negative initial returns, Anhui Expressway with y10.73% and Sichuan Express-
way with y18.71%. The difference between the two sets of returns is not
significant with either a t-test or a Wilcoxon rank test. Overall, it appears we
cannot infer that the initial returns differ across the two groups
Columns 2 and 3 of Table 2 provide the standard deviation of stock returns for
the first 20 days of trading after the firms IPO, and for the first common 6-month
. .
period for all seven firms October 1997April 1998 . Ritter 1984 uses the
standard deviation of stock returns in the immediate post-offer period to proxy for
ex-ante uncertainty. He finds that this variable is positively related to initial
returns. If there is more ex-ante uncertainty about the relaxed listings, one might
expect these listings to have a larger standard deviation of returns.
In column 2, the mean standard deviation for the first 20 days is 2.90% for the
relaxed listing firms and 5.40% for the regular listing firms.
8
The relaxed firms
8
For comparison, the range of standard deviations for the middle one-third of the IPOs in Ritter
.
1984 is 3.35.7%.
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Table 2
Short-term stock price movements
. . Standard deviation of returns % Asia financial crisis event days: firms 1-day stock return %
Initial return First 20 days October 1997April 1998 8r15r1997 9r4r1997 10r20r1997 10r21r1997 10r22r1997 10r23r1997 10r24r1997
1 2 3 4 5 6 7 8 9 10
Relaxed rules firms
Road King y8.33 2.11 4.35 y1.86 y8.89 y0.74 y4.98 y3.40 y20.60 y2.73
GZI Transport 51.08 2.76 5.17 y1.48 y1.55 y2.56 y5.90 y7.14 y24.39 10.92
Jiangsu Expressway y11.57 3.81 5.02 y6.34 y4.79 y8.09 y4.95 y14.76 y5.60 4.68
Average 10.39 2.90 4.85 y3.23 y5.08 y3.80 y5.28 y8.44 y16.86 4.29
Regular rules firms
Anhui Expressway y10.73 2.66 5.53 y5.72 y6.09 y3.80 y1.60 y2.38 y13.99 4.78
Shenzhen Expressway 25.90 3.97 6.07 y3.84 y7.60 y6.64 y7.85 y18.02 y12.08 7.97
Zhejiang Expressway 5.04 3.78 6.43 y6.19 y3.16 y5.36 y5.03 y11.92 y13.53 13.04
Sichuan Expressway y18.71 11.17 6.06 NA NA y10.22 y11.38 y3.99 y18.57 16.43
Average 0.37 5.40 6.02 y5.25 y5.61 y6.50 y6.47 y9.08 y14.54 10.55
a
( ) Difference relaxedIregular 10.02 y2.50 y1.18 2.02 0.53 2.70 1.19 0.64 y2.32 y6.26
. The sample consists of all infrastructure finance firms focused exclusively on road projects in China which issued an initial public offering IPO of equity on the Hong Kong Stock Exchange
during the period of July 1996 through October 1997. Column 1 provides the initial return, which is measured from the offering price to the first day of trading. Column 2 provides the standard
deviation of returns measured over the first 20 days of trading, while column 3 provides the standard deviation of returns for the first common 6-month period for the entire sample. Columns 410
. . provide the 1-day stock returns =100 for the infrastructure firms over various days during the Asia Financial Crisis. 8r15r1997 the date over which returns are measured for Column 4 and
. 10r20r199710r24r1997 Columns 610 were days of intense speculation against the Hong Kong dollar and stock market. 9r4r1997 the date over which returns were measured in Column
. 5 was the date that the Malaysian government announced the cancellation of several high profile infrastructure projects. All numbers are in percentages.
a
Indicates significant difference in a non-parametric Wilcoxon rank test at the 5% level.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 109
appear to have lower variability, although a t-test and a Wilcoxon rank test do not
reject equality of these two sets of numbers.
The highest variability in column 2 is recorded for Sichuan Expressway
.
11.17% , a firm listing under the regular requirements. The 20-day period
covered in this calculation includes a week of great market turmoil on the whole
.
SEHK. See the discussion of the Asia financial crisis below. This relatively high
number might bias the inferences. As a result, we also calculate the standard
deviation over a longer and common period for all seven firms. The mean standard
deviation for the relaxed firms over the 6-month period of October 1997 through
April 1998 is 4.85% and for the regular firms is 6.02%. A Wilcoxon rank test
rejects that the two sets of numbers come from the same distribution at the 5%
level. This finding, that the variability of returns is relatively lower for the relaxed
listing firms, suggests that the relaxed listing firms are no more speculative than
firms listing under the regular requirements.
A third dimension of short-run stock returns that we examine is how these IPO
offers behaved during the Asian financial crisis. All seven of the offers occurred
shortly before or during the Asian financial crisis that began when Thailand
devalued its currency, the Baht, in early July 1997. Even though the primary
victims were in Thailand, Indonesia, and Korea, the crisis had relevance for the
seven Hong Kong infrastructure firms we are looking at. First, a common factor
contributing to the problems was bloated federal budget deficits. Beginning with
Malaysia in September 1997, several of the countries announced drastic budget
cutbacks, including the cancellation of many high profile infrastructure projects.
This news had negative implications for all infrastructure firms in the region.
Second, the Hong Kong dollar and the Stock Exchange of Hong Kong came under
intense speculative pressure as the resolve of China to defend Hong Kongs
currency was tested. If the relaxed listing firms were considered more risky than
the regular listing firms, then we might expect relatively larger stock price
reactions for these firms on the key Asia crisis event dates.
In Table 2, columns 410, we provide the 1-day stock return for the seven
infrastructure firms for the date when Malaysia announced the cancellation of
.
several infrastructure projects September 4, 1997 , and for two periods of intense

speculation against the Hong Kong dollar August 15, 1997 and October 2024,
.
1997 . These dates do appear to be significant events for these firms. For example,
the mean drop in firm value on October 23, 1997 was 16.86% for the relaxed
firms and 14.54% for the regular firms. However, there is no striking difference in
returns across the relaxed vs. regular listing firms. A t-test and a Wilcoxon rank
test fail to reject equality across the two groups for all of these event dates.
A fourth and final dimension of short-run stock price movements that we

examine is reaction to earnings announcements. Pownall and Waymire 1989, p.

.
103 argue that managers are more likely to release earnings forecasts when
substitute sources of information are not available. This argument suggests that the
relaxed listing firms might release forecasts more frequently and that these
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 110
announcements may be more informative due to the lack of alternative, or
historical, information. We conjecture that firms issuing under the relaxed require-
ments may try to compensate for the lack of knowledge or history by making more
frequent, voluntary interim earnings announcements. In addition, the stock price
reaction for any given announcement would be larger for firms issuing under the
.
relaxed rules i.e., each announcement would contain more information .
From IPO issue to mid-1999, six of the seven firms had biannual earnings
announcements reported in the South China Morning Post corresponding to the
publishing of mid-year and year-end results.
9
The exception, Sichuan Expressway,
a regular listing firm, has only issued annual announcements. Across the relaxed
listing firms there were three press reports of interim, voluntary earnings an-
nouncements. Across the regular listing firms, there were four reports of interim,
voluntary earnings announcements. Thus, there is little evidence that one set of
firms provided more frequent earnings announcements than the other.
Across all seven firms, we were able to calculate stock price reactions for 16
annual earnings announcements that also provided the percentage change in
earnings. These calculations are 3-day market adjusted buy and hold returns
around the date the announcement appeared in the South China Morning Post. We
use Datastreams Total Market index for Hong Kong to calculate market returns.
The mean return for the six announcements made by the relaxed listing firms is
1.86%, with a mean change in reported earnings of 14.56 times. This includes an
observation for Jiangsu Expressway which reported an earnings jump of 83 times
in 1997. Without this observation, the mean change in reported earnings for the
relaxed firms is 88.03%. The mean return for the 10 announcements made by the
regular listing firms is 0.122% with a mean change in reported earnings of
253.0%.
To test whether the stock price reactions were larger for the relaxed listing
firms, controlling for the change in earnings, we ran the following OLS regression:
Return sb qb Earnings qb Relaxed q
i 0 1 i 2 i i
where Return sthe 3-day market adjusted buy and hold return for firm i,
i
Earnings equals the reported percentage change in earnings for firm i, and
i
Relaxed is a binary variable set equal to 1 for the six announcements made by the
i
relaxed listing firms and zero otherwise. For the full sample of 16 observations, or
for a sample of 15 that excludes the Jiangsu observation, the beta coefficient
estimates for Earnings or for Relaxed are never significantly different from zero.
Thus, there is no evidence that stock price reactions to earnings announcements by
the relaxed listing firms are larger, a finding that would have been consistent with
9

One of these firms, Jiangsu Expressway has no announcements after April 1998 i.e., it is missing
.
a mid-year and an annual announcement .
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 111
relatively more information in those announcements. The lack of earnings history
for the relaxed rules IPOs does not appear to affect the informativeness of their
later earnings announcements.
2.3. Long-run returns
Although no cohesive theory on long-run performance of IPOs exists, there is
some evidence that IPOs issued by more speculative firms perform especially
. .
poorly in the long run. Ritter 1991 , Loughran and Ritter 1995 and Brav and
.
Gompers 1998 find that smaller issues perform especially poorly in the long run.
.
Michaely and Shaw 1994 find that IPOs managed by high prestige investment
.
bankers have less negative returns over a 2-year period, while Carter et al. 1998
find similar results over a 3-year period.
. .
Ritter 1991 and Loughran and Ritter 1995 argue that firms going public take
advantage of Awindows of opportunityB by going public when investors are
Aoverly optimistic.B Firms issuing under the relaxed requirements may do so
because they are anxious to go to the market immediately, rather than wait until
they are seasoned enough to list under the regular requirements. Thus, firms listing
under the relaxed requirements may be those most likely to be taking advantage of
Awindows of opportunity,B rather than just waiting a year or two until they meet
the requirements for normal listing. In this case, one might expect firms listing
under the relaxed requirements to experience poorer performance in the longer
term.
Fig. 1 provides the stock performance over a longer time period, from October
7, 1997 through June 30, 2000. October 7, 1997 is the first date that all seven
firms are listed. As can be seen from Fig. 1, there is no discernible difference
between the three relaxed listing IPOs and an equally weighted index of the four
IPOs under the normal requirements. Had one invested HK$100 in each on
October 7, 1997, one would have HK$68.27 worth of stock in Road King,
HK$57.38 in Jiangsu, and HK$39.58 in GZI. Alternatively, an equally weighted
index composed of the regular listing IPOs would have been worth HK$56.81 on
June 30, 2000. Overall, the longer-run returns do not seem to be different between
the regular listing IPOs and IPOs listing under the relaxed requirements.
2.4. Compensating characteristics
The data above provide no evidence supporting the contention that the relaxed
listing firms were more speculative than the firms that listed under the regular
requirements. The two sets of firms are surprisingly similar along almost all
dimensions. Moreover, where there appear to be differences, they indicate lower
uncertainty or variability for the relaxed listing firms.
These results suggest that the relaxed listing firms may have been taken public
by reputable investment banks who only sponsored relaxed listing firms that
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 112
Fig. 1. Long-run stock price performance. The sample consists of all infrastructure finance firms
.
focused exclusively on road projects in China which issued an initial public offering IPO of equity on
the Hong Kong Stock Exchange during the period of July 1996October 1997. The figure provides a
graph of the stock price performance for the three relaxed-listing firms, Road King, GZI and Jiangsu,
as well as an equally weighted index of the returns of the firms listing under the regular rules over the
.
period from October 7, 1997 the first day all of these infrastructure firms are all traded through June
10, 2000.
somehow compensated for the lack of a comparable earnings history. Chemmanur
.
and Fulghieri 1994 argue that in assessing the credibility of investment banks,
.
investors use the past performance of previous issues. Beatty et al. 1998 provide
evidence that SEC investigations of underwriters impose indirect penalties on both
.
the underwriter and its past IPO clients. Kroszner and Rajan 1994 find that prior
to the passage of the Glass Steagall Act which formally separated commercial and
investment banks in the US, banks appeared to have reacted to the publics
awareness of potential conflicts of interest by underwriting relatively high-quality
. .
securities. Gompers and Lerner 1999 and Hamao et al. 2000 investigate the
issuance of equity by firms where the underwriter has a prior equity stake through
a venture capital subsidiary and find no evidence of conflicts of interest. All of
these papers suggest that reputation concerns will affect bank behavior.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 113
Column 1 of Table 3 provides the Listing Sponsor for all seven offers. This is
the investment bank that formally sponsored the firms listing on the SEHK.
Usually, the listing sponsor is the same as the lead underwriter.
10
Where appropri-
ate, the parent bank of the listing sponsor is noted in the footnote at the bottom of
the table. Most of the investment banks, or their parents, are readily recognizable
names. Securities Datas investment bank rankings for these firms, based on 1996
11

global equity offerings, range from 3 for Merrill Lynch to 47 for HSBC. For our
.
calculations, we use the lower number closer to one ranking for either the
. .
investment bank or its parent. The range of rankings not shown in the table
across relaxed listing firms is 9 to 47, with a mean of 24.6. The range across
regular listing firms is 3 to 27, with a mean of 17.0. A t-test and a Wilcoxon rank
test do not reject that these rankings are from the same sample. So, the quality of
investment banks appears to be similar across the two sets of IPOs.
Columns 24 in Table 3 provide evidence on whether the relaxed listing firms
had characteristics that might compensate for the lack of a comparable earnings
history. Note, though, that t-tests and Wilcoxon rank tests never reject equality of
the relaxed and regular sets along these three dimensions at the 5% level. Column
2 indicates that, at the time of the IPO, the firms listing under the relaxed rules had
5.3 operational projects on average, compared with only 2.5 operational projects
for firms listing under the regular rules. In fact, two relaxed listing firms, Road
King and GZI Transport, had nine and six operational projects, respectively.
Jiangsu Expressway had only one operational project. By contrast, the largest
number of operational projects for firms listing under the regular rules was four
.
for both Shenzhen Expressway and Zhejiang Expressway . The other two firms
listing under normal rules had one project each.
.
Examining the 1997 turnover total revenue , firms listing under the relaxed
rules had average turnover of HK$391.2 million compared to HK$294.6 million
for the regular listing firms. Examining turnover on a firm-by-firm basis, it
appears that the difference is driven entirely by relaxed listed firm Jiangsu
Expressway. Indeed, Jiangsu Expressway had a 1997 turnover of HK$725 mil-
lionalmost twice that of the largest turnover for any firm listing under the regular
.
rules Zhejiang Expressway with HK$408.9 million . So, even though Jiangsu had
only one operational project, it was almost two times larger than any other road
firm.
10
For all firms except Shenzhen Expressway, this firm was identified in the press as the Listing
Sponsor. For Shenzhen, Merrill Lynch was referred to as the Global Coordinator with no explicit
reference to either a listing sponsor or a lead underwriter. For four of the other six firms, the listing
sponsor was also identified as the lead underwriter. For Jiangsu Expressway and Sichuan Expressway,
no firm was ever mentioned in the press as the lead underwriter for these two IPOs.
11
Securities Datas League Tables rank underwriter quality by gross proceeds of equity underwritten
globally during 1996, with full allocation given to the lead underwriter.
(
)
K
.
L
.
D
e
w
e
n
t
e
r
,
L
.
C
.
F
i
e
l
d
r
P
a
c
i
f
i
c
-
B
a
s
i
n
F
i
n
a
n
c
e
J
o
u
r
n
a
l
9
2
0
0
1
1
0
1

1
1
7
1
1
4
Table 3
Additional comparisons of infrastructure IPO firms
a
. . .
Listing sponsor Operational projects as of IPO 1997 Turnover HK$ million Net profit HK$ million
1 2 3 4
Relaxed rules firms
b
Road King SBC Warburg 9.0 241.4 389.0
GZI Transport Peregrine 6.0 207.1 186.1
Jiangsu Expressway HSBC Inv. Bk. 1.0 725.0 311.4
Average 5.3 391.2 295.5
Regular rules firms
Anhui Expressway Crosby Cap. & CEF Cap. 1.0 209.9 129.9
Shenzhen Expressway Merrill Lynch 4.0 242.7 196.7
Zhejiang Expressway BZW Asia 4.0 408.9 275.5
Sichuan Expressway JP Morgan Sec. 1.0 317.0 147.7
Average 2.5 294.6 187.5
( )
Difference relaxedIregular 2.8 96.6 108.0
.
The sample consists of all infrastructure finance firms focused exclusively on road projects in China which issued an initial public offering IPO of equity on
the Hong Kong Stock Exchange during the period of July 1996 through October 1997. The Listing Sponsor is the investment bank that formally sponsored the
firms listing on the SEHK. Usually, the listing sponsor is the same as the lead underwriter. Where appropriate, the parent bank is noted in the footnote at the
bottom of the table. 1997 turnover is total revenue.
a
SBC is associated with Swiss Bank, Crosby is associated with Societe Generale, CEF is associated with Canadian Imperial Bank, and BZW is associated
with Barclays Bank.
b
Road King had income from joint ventures of HK$193.8 m that was not included in turnover.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 115
Looking at net profit in column 4, the average net profit for firms listing under
the relaxed rules was HK$295.5 million compared with HK$187.5 million for
firms listing under the regular rules. Two of the firms listing under the relaxed

rules, Road King which listed under the relaxed rules because of negative net
.
profit in 1994 and Jiangsu Expressway, earned net income larger than any of the
firms listing under the normal rules, with 1997 net profit of HK$389.0 and
HK$311.4 million, respectively. The third firm listing under the relaxed rules, GZI
Transport, earned HK$186.1 in net profit for 1997, which was larger than the 1997
net income for two of the four firms listing under the regular rules.
In sum, Table 3 provides evidence that the relaxed listing firms had more
projects, or were larger or more profitable than the regular listing firms. These
patterns are consistent with the investment bankers choosing firms which other-
wise compensate for the lack of a comparable earnings history.
3. Conclusion
In this paper, we provide evidence on the Stock Exchange of Hong Kongs

experience with relaxed listing requirements for infrastructure firm IPOs sub-rule
..
8.05 2 . By comparing the characteristics and subsequent performance of the
relaxed listing IPOs to IPOs listing under the regular requirements, we show that
there is no discernible difference in performance across the two groups. Although
the firms listed under the relaxed listing requirements must do so due to a lack of
operating history or profitability, it appears that the firms taken public under these
requirements to date are otherwise no more speculative than issues under the
regular requirements.
We do find evidence, however, that firms going public under the relaxed
requirements sell a smaller fraction to the public at a higher offer price and have
lower variability in stock prices. These findings suggest relatively less risk for the
relaxed listing firms. There is also evidence that, prior to the IPO issue, these
firms had a larger number of operational projects, more turnover, or higher net
income than the regular listing firms. These patterns are consistent with investment
banks choosing not to take highly speculative issues public in order to protect their
reputations.
Clearly, this sample is small and the results cannot necessarily be generalized to
other markets or industries. Indeed, there are several examples of exchanges with
relatively relaxed listing rules that have failed, at least in part, due to the failure of
.
some highly speculative issues. For example, see Aggarwal and Angel 1999 for
.
a discussion of the American Stock Exchanges Emerging Company Marketplace.
The SEHKs experience with relaxed listing rules for infrastructure firms, how-
ever, provides evidence that is consistent with reputation concerns prompting
investment banks to carefully screen which firms to sponsor under the relaxed
listing rules.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 116
Acknowledgements
We thank Phil Berger, Harold Mulherin, Cathy Schrand, and an anonymous
referee for helpful comments. Gerald Tsui at the Stock Exchange of Hong Kong
provided data on Hong Kongs IPO issues.
Appendix A. Description of the sample firms
Road King was a spinoff of Wai Kee Development, a Hong Kong based firm
involved in quarrying, civil engineering, and construction. All of Wai Kees
.
Peoples Republic of China PRC road projects were consolidated into Road King
in October, 1994. At that time, AIG-AIF, a subsidiary of American International
Group, acquired a 40% interest in Road King. In mid-1996, Road King had eight
toll roads in Guangdong, the PRC province next to Hong Kong, and two projects
in Jiangsu.
.
Road King was the first firm to issue an IPO under sub-rule 8.05 2 . It listed
.
under sub-rule 8.05 2 because it did not have 3 years of positive earnings.
Earnings were negative in the 12 months ending 1994, but positive for 1995 and
1996. The prospectus does state that the firm was listing under the relaxed listing

rules. A search of the press for 6 months prior to the IPO in the Asia Pacific
.
Library of LexisrNexis reveals 10 articles on the Road King IPO, with only three
indicating that Road King was listing under the new listing rules.
GZI was the first Ared chipB infrastructure company to be listed in Hong Kong.
Red chip companies are firms with PRC ownership or management. GZI is a
spinoff of Guangzhou Investment, the investment vehicle of the Guangzhou
municipal government. At listing, GZI had six toll road projects in Guangzhou. It
also had right of first refusal for all future road projects in the region. Press reports
indicate that management was considering diversification into other infrastructure
areas, including ports and freight forwarding.
.
GZI listed under sub-rule 8.05 2 because it did not have 3 full years of audited
statements. The prospectus reports positive earnings for 10 1r2 months of 1994, a
full year of 1995, and 8 months of 1996. The prospectus clearly states that the firm
.
was listing under sub-rule 8.05 2 . A search of the Asia Pacific library in
LexisrNexis, however, finds no mention of the listing status in the 6 months prior
to the IPO.
Jiangsu Expressways IPO was an H-share issue. H-shares are shares of
companies already incorporated in the PRC that are to be listed and traded on the
Hong Kong Stock Exchange. Jiangsu Expressway, which runs the Jiangsu section
of the ShanghaiNanjing expressway, was the only listed toll road operator in the
Jiangsu Province. Its primary owner is Jiangsu Communications Investment Co.,
the investment arm of Jiangsu Communications Bureau. The proceeds from the
IPO were to go towards the purchase of other roads in the province.
( )
K.L. Dewenter, L.C. FieldrPacific-Basin Finance Journal 9 2001 101117 117
We were not able to get a prospectus for the Jiangsu Expressway IPO. Press
.
reports suggest that the firm listed under sub-rule 8.05 2 because it did not have 3
.
years of audited statements rather than negative earnings . In the 6 months prior
to the IPO, the Asia Pacific library in LexisrNexis has 10 articles on the Jiangsu
IPO, with only two mentioning that is listing under the relaxed rules.
Regular Listing Firms: All four of the firms issuing stock under the normal
rules were H-share firms. The provincial governments control all these firms. They
fully or partially own from one to four expressways in their respective provinces.
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