Does Access to Equity Promote Trade? Evidence from IPO Approvals in China

This paper investigates the understudied impact of equity financing on firms' export performance. We leverage the unique institutional context of initial public offering (IPO) in China, where firms must obtain formal approval from the regulatory agency for their public listing. Our empirical strategy compares firms that have undergone the IPO approval process, using successful and unsuccessful IPO firms as treatment and control groups, respectively. To sharpen the identification, we exploit the IPO review meeting records to exclude rejections citing clauses indicative of conditions that directly impact a firm's export outcomes. Our difference-in-differences analysis reveals that IPO approval leads to a significant increase of more than 40% in the export value of firms over the subsequent six years. Notably, in contrast to existing research on debt financing, we find that equity financing primarily operates through the extensive margin, with firms expanding into more destination-product markets while making minimal changes to their average exports per market. Furthermore, we identify the acceleration of intangible capital accumulation, such as technology stocks and consumer bases, as well as the alleviation of informational and reputational frictions, as the mechanisms through which equity financing positively affects trade. We also utilize natural language processing (NLP) tools to conduct textual analysis on firms' IPO prospectuses and find supportive evidence for the proposed channels.