The impact of political connection on M&A activity in China

Abstract

This paper studies the influence of political connection on firms’ M&A (Merger and Acquisition) activities using samples of Chinese listed firms from 2002-2012. Chinese listed firms are significantly affected by political connections. Firms with political connection are more likely to engage M&A activities at comparably greater scales. Politically connected firms tends to acquire more state-owned firms. At the same time, we also investigate the influence of political connection on the performance of M&A. Upon completing an M&A, political connections are capable of increasing a firm’s stock price within a short period of time. However, political connection has shown negative effects on M&A performance in the long-run. These effects are more evident when the target firm is state-owned firm. As such, political connections as a non-market mechanism has proved to influence M&A activities. We suggest that supervision departments should monitor political connection stringently and enhance the degree of Chinese marketization to improve the performance of M&A activities.