The Effect Of Political Connections On The Success Rate Of IPO And Corporate Performance

The qualification of listing is a scarce resource in Chinese security market. Under the Examination and Authorized System, the allocation of IPO resources is controlled by government department. The GEM Public Offering Review Committee (hereinafter referred to as the "GEM Committee") is the most important department for getting the qualification of listing. Because of the lack of supervision, there are a lot of rent-seeking opportunities during the examination and verification. Building government connections is a way of rent-seeking. Therefore, this paper discusses the relationship between political connections and the successful rate of IPO.Based on the sample of companies applying for listing on the GEM board from2009to2011, this paper examines (1) the effect of political connections on the probability of successful IPO;(2)the relationship between political connections and post-IPO performance:and(3)whether different type of political connections have significant effect on the probability of successful IPO and post-IPO performance.After controlling for other influencing factors, we find that (1) the probability of successful IPO is significantly higher when a pre-IPO company with political connections. The post-IPO performance of a company operated by politically connected senior executives is worse than that without political connections. It is suggested that political connections of the pre-IPO companies have negative effect on the allocation of IPO resources. In order to study the influences of different type of political ties, this paper classifies political associations as "government officials" connections and members of People’s Congress (PC) and Chinese People’s Political Consultative Conference (CPPCC) connections. After controlling for other influencing factors, we find that (2)"government officials" connections of the pre-IPO companies can significantly improve the successful rate of IPO. And there is no obvious relationship between "government officials" connections and the post-IPO performance of listed companies on the GEM board.(3)"Members of PC and CPPCC" connections of companies preparing to list on the GEM has no statistically significant impact on the success of IPO. The companies with "members of PC and CPPCC" connections significantly underperform those without "members of PC and CPPCC" connections. Taken together, our findings suggest that political connections distort the allocation of IPO resources, leading to the loss of efficiency. Considering different types of political connections,"government officials" connections are better than "members of PC and CPPCC" connections in both improving the probability of successful IPO and post-IPO performance.According to the conclusions, we give suggestions to the GEM IPO issuers and the China Securities Regulatory Commission (hereinafter referred to as the "CSRC").In order to improve the fairness, equality and transparency of the allocation of EPO resources and to reduce the possibility of rent-seeking, the CSRC should increase the supervision on powerful department especially the "GEM Committee. The GEM IPO issuers can improve the successful rate of IPO by employing former or current government officials as the managers of the companies. However, the political connections are helpless for improving the post-IPO performance, hence companies listed on GEM board should concentrate on capacity-building rather than political association.The contributions of this study are mainly manifested in the following three aspects:(1) This paper analyzes the factors that affect IPO from the perspective of political connections. Existing literatures rarely study the influencing factors of IPO success rate. Chen Donghua, et al.(2008) searched the government regulation on the allocation of IPO resources from the perspective of the "CSRC"; Lee Mincai, Liu Feng (2012) found that intermediaries’social capital can help companies to get the qualification of listing. We study the influencing factors of IPO from political connections perspective, which extends the research of the IPO resource allocation.(2) This paper provides direct evidence on the relationship between political associations and the probability of successful IPO. It not only studies the relationship between the company’s overall political association and IPO, but also considers affections of the different types of political connections. As a result, it enriches the research of political-connected literatures.(3) It extends literatures on GEM issues. The GEM board is obviously different from other capital market board. The function orientation of GEM is providing financial service for growing and innovative SMEs (Small and Medium-sized Enterprises). Current GEM literatures concentrate on IPO underpricing,"three high" phenomenon, senior management resignation and reduction and performance. Therefore, researching on the IPO institution increases additional evidence on IPO issues.In this paper, there are still some deficiencies, mainly reflected in the following three aspects:(1) Since the objective limits of the data, this study can not distinguish between the impact of political connections on short-term performance and long-term performance. According to the sample, the average listing age is1.47. Therefore, we get the conclusion based on the short-term post-performance.(2) The probability of successful IPO is83.51%on the GEM board, and the proportion of companies listed on GEM with political connections is80%. Therefore, in terms of sample selection, there is a certain deviation.(3) The measurement and classification of politically connections. This paper measures political association with the proportion of political-connected executives. And we only choose one way to classify political connections. The measurement and classification of politically connections is simple, the further step is classifying and measuring in detail.The remainder of the paper proceeds as follows.Chapter1is introduction. This chapter introduces the background, intention, significance, and framework of the research topic.Chapter2is literature review. This Chapter reviews the major literatures on political connections and influencing factors of IPO.Chapter3is institutional background and theoretical analysis. This Chapter discusses the institutional background of the GEM IPO and develops the hypotheses based on underlying theories such as the rent-seeking theory, social capital theory and government intervention theory. Chapter4is empirical research on the relationship between political connections and the probability of successful IPO. This chapter analyzes the effect of political connections, including "government officials" connections and "members of PC and CPPCC" connections, on the successful rate of IPO.Chapter5is empirical research on the relationship between political connections and post-IPO performance of GEM companies. This chapter considers the association between political connections and post-IPO performance.Chapter6is conclusion and suggestion. According to the above assumptions and empirical analysis, this chapter concludes the paper, put forwards suggestions and points out the shortages.