Study On The Expropriation And Political Connection Under Government Intervention

Government intervention will lead to two economic phenomena: one is the prevalence of"the grabbing hand"of government; the other is the prevalence of political connection. However, there are only a few direct empirical evidences on the channels of"the grabbing hand". One purpose of this paper is thus to provide direct empirical evidence on the channels of"the grabbing hand"with mergers. In addition, the extant literature does not examine the relationship between political connection and expropriation by the controlling shareholder. Thus the other purpose of this paper is to examine the relationship between political connection and expropriation by the controlling shareholder, and provide the corresponding empirical evidence.Using a sample of 227 mergers with local government-controlled acquirers and unlisted target firms from 2001 to 2005, we examine the effects of government intervention and political connections on the announcement abnormal returns of local government-controlled acquirers. We find that local government-controlled acquirers get negative abnormal returns, which is contrary to the theoretical prediction and the empirical result of the extant literature in the West. Further evidence shows that the difference of the result between this paper and the extant literature in the West results from the fact that the local government has strong incentives to intervene on the merger activities of local government-controlled firms to achieve his political goals, providing direct empirical evidence on"the grabbing hand". We also find that local government-controlled acquirers with political connections get higher abnormal returns, which indicates that political connections can be used as the substitution of investor protection to prevent the local government from expropriating the firms.Using a sample of mergers with listed acquirers and unlisted target firms from 2001 to 2005, we examine the corporate governance of cross-province merger. We find that the cross-province merger with entrepreneur-controlled acquirer is an important channel for corporate governance, while the cross-province merger with local government-controlled acquirer does not play a governance role. Further evidences on the mergers of local government-controlled acquirers show that: the abnormal returns of the acquirer in cross-province megers are worse than those in same-province mergers; the probability that an acquirer is cross-province rather than inside-province is higher in the province with worse fiscal condition; local government-controlled acquirers prefer to acquire the target in the province with better fiscal condition and investor protection. The empirical evidences provide further empirical evidence on"the grabbing hand".Using a sample of family firms that do IPO directly, this paper analyzes the connection between political conncetion and expropriation by the controlling shareholder. We find that companies connected with officials have higher divergence between cash flow and control rights, worse abnormal returns during expropriating related transaction announcement. The differences between connected and unconnected firms become particularly pronounced when connected firms operate in the provinces with less developed banking markets. In addition, the divergence between cash flow and control rights is positively related to political links. The empirical evidence shows that political connection increases the expropriation by the controlling shareholder.