Does reputation of sponsors matter in IPO? : evidence from Hong Kong

Contrary to other markets where underwriters perform a combined role of underwriting and sponsoring in Initial Public Offering (IPO), IPO issuers in Hong Kong must appoint at least one sponsor in addition to underwriters. The split of the single role of underwriters into two separate ones offers an ideal setting to disentangle the effects of the two roles and to examine which of the two roles - sponsor or underwriter - is more important in explaining IPO underpricing and initial volatility in the Hong Kong equity market. Interestingly, the findings provide supportive evidence that the reputation of sponsors does matter in IPO and it is even more significant than the reputation of underwriters in explaining the IPO underpricing phenomenon. Given the recent high-tech fervor, this research goes deeper to examine specifically the role of sponsors on high-tech firms and results indicate that the reliance on sponsors is higher for traditional issuers than for technology firms. The paper further explores to discover that sponsor and underwriter are playing substitution roles rather than complementary roles to each other. In 2013, in order to maintain the high standard of IPO sponsors, the Securities and Futures Commission launched the new sponsor regulatory regime to further regulate IPO sponsors in Hong Kong. In order to examine the regulatory policy impact, the study also extends to compare the role of IPO sponsors before and after the launch of the new sponsor regulatory regime in 2013. The empirical findings lend support to the argument that after the launch of the new regulations, public awareness of sponsors is raised, respect towards more reputable sponsor increases, and thus the role of sponsors becomes more important than before. This research sheds light on the relatively unexplored area of the relevant literature and contributes to providing new insights with respect to both academic and business implications.