China's Initial Public Offering Peer‐based Valuation: Market versus Regulatory Pricing Regimes

In 2014, China's initial public offering (IPO) valuation regime shifted from market‐based pricing to a regulatory system with a de facto 23× P/E ratio cap. This institutional change provides a compelling setting to examine how institutional constraints affect valuation efficiency and information transmission. Using a sample of IPOs and hand‐collected peer firms, we document that regulated IPOs are systematically undervalued by 42–56.9% relative to their peers. Their valuations negatively predict post‐IPO returns, while market‐priced IPOs exhibit no such pattern. A low‐minus‐high price‐to‐value strategy yields annualized abnormal returns of 15.6% for IPOs under regulatory pricing, with no comparable profits under market pricing. These effects appear to operate through two interconnected channels: corporate competitiveness and stock price informativeness. Rather than reflecting costly signalling, constrained valuation serves as an information revelation mechanism of firm quality. Our findings provide novel evidence on how institutional frictions shape information transmission beyond conventional signalling incentives.