Political Connections and Ownership Structure on Private-Equity Placements: Evidence from China

Abstract

In contrast with other countries, Chinese firms must obtain approval to make private-equity placements (PEP) from the Chinese Security Regulatory Commission (CSRC), a state bureau that regulates capital market financing. We analyze the role of political connection (PC) and ownership types when accessing private equity, and investigate the mechanisms through which this political affiliation operates within the regulatory process of PEPs. Findings suggest that PC status does not contribute to a firm’s decision to apply PEPs, but firms with state-ownership demonstrate a higher propensity to apply PEPs. PC status appears to aid firms obtain approval from CSRC, and these firms are more likely to receive favorable treatment versus companies without connections. PCed firms spend less time managing bureaucracy, and those firms are less attractive to private-equity investors. Results from this study provide important insights for investors, PEP-issuing firms, and security-market regulators.

Keywords: China, Political Connection (PC), Ownership, Private Equity Placement (PEP)

JEL Classification: G10, G28, P34