Pyramid IPOs on the Chinese Growth Enterprise Market

This paper investigates Initial Public Offerings (IPOs) of high-tech firms on the Chinese Growth Enterprise Market (GEM). Almost half of the high tech IPOs on the GEM are set up in pyramid structures. The likelihood of a pyramid structure increases with the size of the IPO firm and state control. Our results do not suggest that pyramids are set up to overcome financial constraints. However, we document that pyramid IPOs are discounted before the IPO. The price to book ratio estimated at the subscription price is significantly lower for pyramid IPOs compared to stand-alone IPOs. Furthermore, the underpricing is higher for pyramid IPOs. We conclude that IPO investors demand a higher risk-premium when investing in pyramid IPOs which translates into a lower subscription price and higher underpricing.