Research on the Adverse Selection of Chinese Enterprises IPO

In Western corporate finance theory, the Pecking order Theory suggests that when the company needs financing externally, it should firstly debt financing then equity financing. The reason is that the company will face more serious adverse selection in equity financing. However, Chinese enterprises usually have a strong preference on equity financing, this article estimates the intrinsic IPO value of the stock of 77 Chinese companies in Shenzhen and Shanghai through a cash dividend discount model, to explore the adverse selection problem. The results will provide a fundamental basis for decision-making of economic regulation and control departments.