Do private equity investors conspire with ultimate owners in the IPO process?
This paper examines the interactive effect of private equity (PE) and ultimate owners on the process of firms' going public. We find that firms with high excess control rights have more earnings management before IPO, and they are more likely to seek PE investors especially when the earnings management are high. We further show that the involvement of PE investors increases the probability of the firms' IPO application being approved by the regulators in firms with high excess control rights. However, the PE-backed firms with high excess control rights are found to have higher IPO fee, lower initial returns and lower longterm post-IPO performance. We argue that in emerging markets where the protection of minority shareholders is weak and the economy is dominated by relationship and networks, ultimate owners have strong incentive to seek PE investors to help them accessing the IPO market in the expense of minority shareholders' interest especially when they have excess control rights. Instead of playing monitory role, PE investors actually conspire with the ultimate owners to exploit minority shareholders' interests and both PE investors and controlling shareholders become big winners, while minority shareholders are the only loser in the process of IPO.