Political Connection of Financial Intermediaries and its Economic Consequences -Evidence from Chinese IPO market

Project: Research

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Researcher(s)

Description

Political connections are considered to be pervasive around the world and play an important role in economic life, especially in emerging markets with less developed legal systems, more government interventions, and weak investor protection (e.g., Claessens et al. 2008; Fan et al. 2007; and Faccio 2006 etc.). Prior studies mainly investigate the implications of firms’ political connections for their economic behaviors and performance in various aspects, including access to bank loans, terms of borrowings, bailout events, long term performance, and market values etc (e.g., Fisman 2001; Faccio et al. 2006; and Ferguson and Voth 2008 etc.).In this research project, we attempt to explore political connection of financial intermediaries and its economic consequences by focusing on the role of underwriters’ political connection in Chinese IPO market. China presents itself as an ideal experimental field to examine this important issue since Chinese government imposed many restrictions on the IPO process and firms need to obtain approval from Chinese Securities Regulation Committee (CSRC thereafter) to go public. Bountiful anecdotal evidence suggests that political connection of underwriters’ has a significant impact on the approval process of IPOs. We thus plan to utilize this setting to address the following research questions: 1) whether the likelihood of IPO application being approved is greater for IPOs underwritten by politically connected underwriters; 2) whether politically connected underwriters experience superior market share growth; 3) whether the politically connected underwriters enjoy a fee premium for their underwriting businesses; 4) what is the impact of underwriters’ political connection on the underpricing of IPOs; 5) whether information risk of IPO firms underwritten by politically connected underwriters is greater; 6) whether the post IPO performance is poorer for firms underwritten by politically connected underwriters. The empirical findings would shed light on the role of financial intermediaries’ political connection in capital market, as well as its implications for the overall economy. It thus adds to the growing literature on the value of political connections. Our study also contributes to the extensive underwriters’ literature on underwriting fees, underpricing, and post-IPO performance etc., comparing the importance of political connection vs. professionalism in securities markets with strong government intervention. In addition, our study would generate important insights on the process of Chinese firms going public to enhance our understanding of the unique features of the China’s securities market.

Detail(s)

Project number9041697
Grant typeGRF
StatusFinished
Effective start/end date1/01/1219/06/15