Political Connections And The Path Choice Of Enterprises’ Listing

Political connections have brought financing convenience to enterprises.At the same time,non-political connection companies’ financing constraints make these companies eager to obtain funds through listing,and they must choose a way that can be passed quickly and has low requirements for political connections.Of the two ways of listing in China,the speed of reverse merge is fast,but it needs to pay high backdoor fees,bear the legal and integrate risks in the backdoor,while the initial public offering needs to sustain the uncertainty and possible IPO discrimination of the listing review,waiting for a long time.We studied the companies listed in China through initial public offerings(IPOs)and backdoor(RM)listings.By comparing and analyzing the data of RM companies manually collected and the IPO company data in the database,we found that before listing,RM companies were relatively Larger,more profitable,and less politically connected.Even after matching the industry and scale,compared with Chinese IPO companies,Chinese RM companies still have better operating performance before listing.This result is completely different from the conclusions drawn by foreign scholars in developed markets.We attribute this difference to China’s IPO issuance review system that is strict,highly uncertain,and potentially discriminatory.This kind of IPO discrimination may prevent high-quality companies from entering the open market,while companies with better political connections will be more inclined to choose IPOs instead of RM to enter the open market.Instead RM companies lack political connections and cannot obtain financing quickly through politically preferred IPOs,so they can only pay a high backdoor cost to go public.In terms of performance after listing,generally the performance of RM companies is generally stronger than that of IPO companies.More specifically,RM companies with higher political connections have achieved relatively worse postIPO performance.At the same time,In the absence of political connections,the performance of RM companies is higher than that of IPO companies,and political connections have not indused significant performance differences for IPO companies.From this result,we get more detailed information about the relationship among political connections,the listing path and listing performance: The nonpolitical connected RM companies have better post-listing performance than the politically connected RM companies and the IPO listed companies(regardless of political connected or not),the political connection actually weakened the postlisting performance of the RM company.Our conclusion that the post-RM performance of RM companies is better than that of IPO companies is based on the fact that the performance of RM companies with non-political connections take a lead over IPO companies.We believe that a considerable number of high-quality yet lacking political connections companies are pushed to the RM path that requires a large amount of expensive fees to enter the open market,providing an opportunity for many speculators to backdoor for speculation.Finally,our empirical results speculate that the nature of state-owned enterprises can alleviate the decline in the effectiveness of capital market functions brought about by this political connection.Before going public,we don’t think that state-owned enterprises need to consider the impact of political connections on their choice of IPO and RM.After the listing,After listing,we believe that the gap between the performance of politically connected state-owned RM enterprises and that of non-politically connected state-owned RM enterprises no longer exists,and that politically connected enterprises can partly eliminate their concerns about the performance of RM after listing,so as to choose the listing path unbiased.In the future capital market construction and development we need to perfect the registration system as much as possible so that companies have fair listing options,avoid the government to conduct substantive audits of enterprises on behalf of investors,and avoid potential IPO political connection discrimination.At the same time,we must also improve the delisting system to avoid the excessive value of shell resources as a source of chaos in the capital market and disrupt the functional effectiveness of capital market financing.