Political Connections, Government Intervention and Acquirer Performance in Cross‐border Mergers and Acquisitions: an Empirical Analysis Based on Chinese Acquirers

Abstract

The extant literature suggests that the political connections enjoyed by Chinese acquiring firms have both positive and negative effects on their performance in cross‐border mergers and acquisitions (CBMA). We employed firm‐level data on Chinese acquirers from 2001 to 2012, demonstrating that the effect of political connections on mergers and acquisitions performance is determined by external government intervention. Holding the level of political connections constant, the greater the degree of government intervention is, the worse the acquirer's performance in cross‐border mergers and acquisitions will be. We also demonstrated that political connections affect acquirer performance in cross‐border mergers and acquisitions through the channel of preferential access to bank financing, and the acquiring firms' high cash holdings, which are encouraged by the ease of bank financing, have a negative effect on acquirer CBMA performance. Using the Blinder‐Oaxaca decomposition, we investigated changes in the Chinese acquirers' performance following changes in the external policy environment in 2008 and the effect of political connections and other factors on this change.

The Role of Government in Cross-border Acquisition

“…Different from developed Western countries, China's contemporary economic and policy environment highlights that political factors importantly implicate the character of the cross-border acquisition activities of Chinese acquirers [2]. So far, China's national political power structure is based on the "6+1+2" system with the Central Committee of the Communist Party of China as the core, the power is relatively centralized, government intervention in the economy has been written into the law since 1980s and 1990s.…”

Examining political connections to study institutional change: Evidence from two unexpected election outcomes in South Korea

“…For instance, politically connected firms also tend to have lower accounting standards (Chaney, Faccio, & Parsley, ), their managers tend to have less professional experience (Fan, Wong, & Zhang, ), and unconnected firms might benefit vis‐à‐vis politically connected firms from policy reforms, such as financial liberalisation (Chan, Dang, & Yan, ). Yang and Zhang () find that the benefits of political connections on the performance of Chinese mergers and acquisition are not straightforward but contingent on other factors. Siegel () shows that an unexpected change in government could turn beneficial political ties into a liability and vice versa in South Korea.…”

Acquirer size, political connections and mergers and acquisitions performance

“…On the one hand, large companies usually have more and stronger political connections and market power to protect them from government rent-seeking, corruption and expropriation in M&A activities in the weak-governed environment, which can increase the shareholder wealth (Brockman et al , 2013; Farina, 2002; Yang and Zhang, 2015). On the other hand, the weak legal system and poor corporate governance mechanisms in the weak-governed country would result in severe agency problems, which can aggravate managers to conduct over-investment and value-destroy M&A deals (Allen et al , 2005; Chen et al , 2011).…”

“…Political connections are more common and more complex in China (Fan et al , 2007; Wu et al , 2012; Yang and Zhang, 2015). Although existing studies do not achieve an agreement on the role of political connections, Humphery-Jenner and Powell (2014) argue that political connections can bring large acquirers some benefits to offset the loss caused by acquirer size effect, especially in the weak-governed country.…”