Political Connection Of Financial Intermediaries

The main function of the capital market is to achieve the optimal allocation of capital,the scarce funds wrong rationing to inefficient companies means low efficiency,impede capital market configuration and economic growth.The presence of government regulations of the capital market and the various relationships,especially the political connections,increased mismatch of the capital market.In the stock market,listed companies,investors and financial intermediaries(such as a brokerage firm,audit firm),and government regulatory authorities form the main body of the securities market.Previous studies have focused on the political connections of the listed companies on the value of the companies and negative effects to the society,but they ignore the impact of the political connections of the underwriter as financial intermediaries to underwriter itself,listed companies and society.In this paper,starting from the underwriter’s political conncetions,we study the economic consequences of the financial intermediaries’ political connections.This study has certain innovation and value,First of all,this study is to enrich and expand political connection research,from the angle of the underwriter,we study the role of the financial intermediaries’ political connections in the emerging capital markets,to fill the blank of political connections in this regard;Second,from the view of financial intermediation,we study the regulation leading to rent-seeking behavior,as well as the impact on the allocation of resources;Finally,we show the function and value of the financial intermediaries in transition economies,to provide new ideas for the understanding of the function and value of the financial institutions.Specifically,this paper uses the data of the A-share IPO market in 2004-2009,from the angle of the underwriter and company to study the economic consequences of the political connections of the underwriter on the underwriters and their sponsored enterprises.From one side,namely the view of underwriter,We found that the underwriter with political connections compared to the underwriter without the political connections has a higher market share;In the stage of comprehensive management to the underwriters,the possibility of underwriter having political connection closed is smaller;the possibility of the underwriter executives’ turnover in the underwriters with political connections is smaller,thus indicating that these underwriter firms pay attention and rely on the political connections.From another side,namely the view of firms,we show that underwriters,political capital can significantly increase the probability in obtaining IPO approval for their client firms,which is a key step for firms to access equity market in China.Accordingly,we show that politically connected underwriters charge a fee premium for their underwriting services.The company underwriting by securities firms with political connection have higher level of earnings management.Further analyses show firms underwritten by politically connected firms underperform the others in the post IPO period,in terms of stock returns and earnings growth.Moreover,attempting to identify the possible underlying forces for the underperformance,we show that clients of politically connected underwriters are more likely to change the use of the proceeds raised in IPOs and make investments in a less efficient manner.In addition,we do not find a significant difference in the IPO underpricing for deals underwritten by politically connected vs.non-connected investment banks.Such findings suggest that the minority shareholders’ interests would be impaired when the IPO market relies heavily on the political capital rather than the professionalism of the underwriters.In summary,our findings emphasize the importance of political connection of the underwriting investment banks in the IPO market in an emerging market,where there is government intervention in the IPO screening process.This could be attributed to the lack of supporting market institutions to value the professional reputation as in more developed economies like the U.S.The relationship-based model of the business in turn will potentially become a hurdle to the development of market-oriented institutions.Therefore,to reduce government intervention on the market,and improve good institutional environment,and to protect the reputation mechanism effectively is the key to the further reform of China’s securities market.