Does supplier stability matter in initial public offering pricing?

Leveraging the availability of supplier and pre-IPO information in China, we examine the impact of supplier stability information disclosure on the IPO discount. Our findings suggest that when an IPO firm has stable suppliers, it has less IPO discount than an IPO firm with unstable suppliers. The results are robust to alternative measures of IPO discounts and supplier stability, and they are consistent with the information asymmetry explanation of IPO discount. Hence, IPO firms can leave less money on the table by maintaining stable suppliers. In addition, we document that stable supplier IPO firms, on average, exhibit higher real earning management in terms of discretionary production cost than those of unstable supplier IPO firms. Furthermore, the difference-indifferences analysis suggests that consistent stable supplier IPO firms have a higher share of purchase ratios than those of unstable supplier IPO firms post-IPO. The findings are consistent with the notion that stable suppliers transmit benefits to IPO firms pre-IPO to help these firms get regulatory approval, and, post-IPO, the IPO firms return the favor to the stable suppliers.