Can purchase of IPOs by employees alleviate the underperformance of new shares?

Abstract

In 2019, China's registration-based reform of the STAR Market introduced a new form of employee stock ownership plan called Employee Strategic Placement (ESP), which allows employees to purchase company shares during the IPO process. We examine whether ESP can alleviate the long-term underperformance commonly observed in newly listed stocks. Our findings reveal that although significant post-IPO underperformance persists under the registration-based system, firms adopting ESP outperform non-ESP firms by approximately 24 percentage points in one-year buy-and-hold abnormal returns based on matched-firm comparisons. This positive effect remains significant, though somewhat attenuated, over a longer horizon. ESP enhances innovation output and strengthens investor relations management, which in turn helps mitigate underperformance. Furthermore, the positive impact of ESP is particularly strong in firms with lower managerial ownership and weaker corporate governance.