N°24-54: China's IPO Screening with Partial Regulatory Capture

China's IPO approval process co-opts audit firm representatives into the regulatory decisionmaking body, creating conflicts of interest and potential channels for corruption. We show evidence that co-opted audit firms (i) do not differ in their audit practice of listed firms from other audit firms, but (ii) attract more borderline IPO clients that marginally meet the listing requirements, (iii) increase the chance of IPO approval for their borderline candidates, which (iv) afterwards underperform regular IPO stocks by 45% in terms of their average two-year buy and hold return. Moreover, (v) these borderline IPO firms show poorer accounting profitability, suggesting potential misrepresentation of firm prospects at the IPO stage.