Political connections with corrupt government bureaucrats and corporate M&A decisions: A natural experiment from the anti-corruption cases in China

Abstract

Using 29 recent high level anti-corruption cases in China as a natural experiment, we examine the patterns in merger and acquisition (M&A) decisions and performance in Chinese non-state owned enterprises (non-SOEs) before and after the exogenous severing of political connections. We identify a set of listed related non-SOEs whose managers bribed or had connections, through past working and educational experience, with corrupt bureaucrats from 2005 to 2011. We document that, after the arrest of corrupt bureaucrats, corruption related non-SOEs lose their competitive advantages in the M&A market. We observe a significant reduction in the likelihood of conducting M&As and the ability to access local and state-owned targets for these firms. They pay a higher takeover premium and consequently have worse post-M&A performance. Our results are robust when we exclude bribing firms, and firms whose related corrupt bureaucrats are arrested within a year before the announcement of the M&A.Furthermore, the influence of anti-corruption events varies across regions that have different levels of corruption index and industries with different levels of government support and competition. Overall, our study provides direct evidence to the question of why firms seek to establish connections with government officials through bribery or personal connections, and we reveal the benefits and costs of such connections.Commission for Discipline Inspection of the Communist Party of China records that 643,759 corruption cases were under investigation, 639,068 corruption cases were concluded, 668,429 people were punished by the administrative and Party disciplinary agencies and 24,584 people were transferred to the judicial organs for further investigations, from the end of 2007 to 2012.There were 81,391 commercial bribery cases that were under investigation, and more than 20 billion Chinese yuan were involved in these cases. This huge number of corruption cases not only provides opportunities to conduct our studies, but also reveals the importance and prevalence of having connections with government officials in China. Furthermore, the network (so-called 'Guanxi') is regarded as one of the most important and dominant factors in business operations in China, rather than formal contracts (Xin and Pearce, 1996). Under this institutional environment, the impacts of informal social connections such as political connections are enhanced.Secondly, the Chinese government still has a great capacity to intervene directly in firms' M&As at the various levels. For instance, while the Chinese economy has transformed from a government-controlled to a market-oriented economy, local governments still retain the right to allocate various resources through licensing, granting the right of land use and access to the capital market (Cull and Xu, 2003; Firth et al., 2009;Li et al., 2009 and.Moreover, M&A deals must obtain permission from local governments if they relate to a stateowned enterprise (SOE). Under these circumstances, Chinese firms will have a strong...

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