The Inclusiveness of the STAR Market and Investor Protection: Evidence from the IPO Pricing of Unprofitable Enterprises

【Authors】

SONG Shunlin, ZHAO Yujia & CAO Aochen

【WorkUnit】

Central University of Finance and Economics, 100081.

【Abstract】

The diverse and inclusive listing criteria of the Science and Technology Innovation Board （STAR Market） of the Shanghai Stock Exchange are a key institutional innovation in the registration-based IPO reform to enhance the capital market’s ability to serve scientific and technological innovation. However, the potential impact of such inclusive criteria on investor interests remains a significant controversy in both academia and market practice. Proponents argue that such inclusivity fosters innovation, attracts the listing of high-growth enterprises, and accelerates the industrialization of scientific and technological achievements. Opponents, on the other hand, worry that early-stage technology enterprises generally face risks such as rapid technological iteration and unstable business models, which may jeopardize investor interests.
This paper posits that investor protection in the IPO market hinges on pricing efficiency. If unprofitable enterprises are accurately priced at IPO, regardless of their qualifications, their risk can be mitigated to protect investor interests. Based on this, this paper takes enterprises that went public on the STAR Market from 2019 to 2022 as samples to examine the first-day pricing efficiency of unprofitable enterprises and their medium-to-long-term market performance. The research results show that compared with profitable enterprises, unprofitable enterprises achieved higher first-day returns and better medium-to-long-term market performance after listing. These findings still hold after multiple robustness tests. Mechanism tests indicate that due to the higher value uncertainty of unprofitable enterprises, underwriters are more conservative in setting offer prices for unprofitable enterprises. Heterogeneity analysis shows that the first-day return premium is more pronounced under weak market sentiment, low R&D investment, tight cash flow, smaller estimated market value, and poor third-party reputation. In addition, for enterprises that were unprofitable before listing, the divergence in underwriters' valuations is greater, investors’ subscription enthusiasm is relatively lower, and brokers’ accounting performance forecasts for them are more conservative. However, the actual trend of their accounting performance after listing is more outstanding.
The contributions of this paper are mainly reflected in three aspects. First, it expands the research on IPO pricing efficiency from the perspective of unprofitable enterprises. Second, it enriches the literature on the economic consequences of the registration-based IPO reform, revealing the impact of inclusive listing criteria on investor interests. Third, it provides policy references for regulatory authorities, supporting the continued listing of unprofitable enterprises to attract enterprises from the emerging sectors on the premise of strengthening information disclosure and multidimensional index supervision.
The research conclusions have important implications for policymakers: the inclusive listing system of the STAR Market has been generally successful, and it should continue admitting unprofitable enterprises. At the same time, it is necessary to continuously strengthen the monitoring of R&D investment, cash flow, and revenue metrics of these enterprises, improve the quality of information disclosure, and guide rational investment to protect investor interests. Future research can be expanded to other economic consequences of the listing of unprofitable enterprises, the economic consequences of other special listing categories, or the impact of new STAR Market mechanisms, such as the “Sci-Tech Growth Layer”, on investor protection.

JEL: G14, G18

【KeyWords】

Inclusive Listing Criteria, Investor Protection, Unprofitable Enterprises, IPO Underpricing, Post-IPO Market Performance