Unexpected Information, Investor Attention, and the Contagion Effect of IPO Withdrawal

Abstract

Abstract We investigate whether firms’ withdrawals of their initial public offering (IPO) applications, as announced by the China Securities Regulatory Commission (CSRC) on 3 April 2013, lead to a contagion effect on the market reaction to other listed firms sponsored by the same agent. We find that listed firms that have the same sponsor as an “IPO withdrawing firm” face a negative market reaction, suggesting that firms’ IPO withdrawals make investors worried about the quality of sponsors and cause negative abnormal equity returns for listed firms with the same sponsor. We also find that this contagion effect is concentrated among listed firms with good accounting information because this event provides more unexpected negative information for investors. In addition, the contagion effect is concentrated among listed firms with more media or analyst coverage. This is because media and analyst coverage attracts investors’ limited attention, making them more pessimistic and finally leading to an increase in the contagion effect. Our study provides support for the contagion theory and investigates the effectiveness of the CSRC’s special checks on financial statements, which may give some suggestions for the healthy development of the IPO market.