Political connections and the process of going public: Evidence from China

Abstract

a b s t r a c tWe examine how political connections impact the process of going public. Specifically, we test how political connections impact the pricing of the newly offered shares, the magnitude of underpricing, and the fixed cost of going public. Based on the experience of the newly public firms from Chinese security markets and using multiple measures of political connections, we find robust evidence that the issuing firms with political connections reap significant preferential benefits in the process of going public. To be specific, we find that firms -irrespective of their ownership status -with greater political connections have relatively higher offering price, lower underpricing, and lower fixed costs during the going-public process.Published by Elsevier Ltd.

Political connections and access to IPO markets in China

“…The works of Francis, Hasan, and Sun (2009) and Hu and Liu (2011) are two studies that are most closely related to the subject examined in this article. Francis et al (2009) test how political connections impact the pricing of IPOs in China's context and finds that firms with stronger political connections tend to have higher IPO prices, lower degree of IPO under-pricing, and lower IPO-related fixed costs.…”

“…There are some differences in the definitions of political connections among previous studies (e.g., Faccio, 2006;Faccio et al, 2006;Ferguson & Voth, 2008;Francis et al, 2009). Faccio et al (2006) define two categories of political connections: direct connections and indirect connections.…”

“…Francis et al (2009) test how political connections impact the pricing of IPOs in China's context and finds that firms with stronger political connections tend to have higher IPO prices, lower degree of IPO under-pricing, and lower IPO-related fixed costs. Francis et al (2009), however, fail to examine the more critical issue, i.e., the relationship between political connections and firms' chances of being approved for IPOs.…”

“…Francis et al (2009) test how political connections impact the pricing of IPOs in China's context and finds that firms with stronger political connections tend to have higher IPO prices, lower degree of IPO under-pricing, and lower IPO-related fixed costs. Francis et al (2009), however, fail to examine the more critical issue, i.e., the relationship between political connections and firms' chances of being approved for IPOs. Using a sample from 2006-2008, Hu and Liu (2011 find that in China's state-controlled going public process, state-controlling ownership does not have significant positive impact on firms' chances of being approved for IPOs, while POEs with political connections are significantly more likely to be approved for IPOs.…”

Political regimes and stock market development

“…She also reports political connections to be more valuable for firms in highly corrupt environments; political connections are also uncommon in countries with better legal systems. Francis et al (2009) in their study of firm's going-public on China's security markets report that firms with greater political connections to the Chinese government have higher offering price, experience lower underpricing, and have lower fixed costs. Ferguson and Voth (2008) study a sample of firms listed on the Berlin stock exchange in 1933 and find firms with ties to Hitler's Nazi party outperforming unconnected firms; these connected firms experienced returns of 5-8 percent higher than their unconnected counterparts.…”