The impact of political connections on IPO activity in China

Abstract

This paper analyzes the impact of political connections on IPO activity using panel data from 16th to 19th People’s Congress of China. Two types of political connections are studied in the paper: the Central Committee’s political connection and executive’s political connection. We find that enterprises with executives have government background under performs in management performance and short-term stock prices. There is no significant relationship with company’s the first day’s performance and financing. However Central Committee type of political connection allows company's stocks have higher initial rate of return, increasing the company's management performance and bringing convenience to financing behavior. Both types of political connection have impact on company’s IPO performance. However, the influence of political connections on IPO performance varies according to the nature of the company. The results of this study suggest that enterprises can make full use of the political connection they have in the early development stage, but should not over-rely on it. To allow for market-oriented economic development, government departments should not excessively interfere in economic behaviors.

Keywords: Political Connections, IPO enterprises, IPO activity, China