The Value of Political Connections in Chinese IPO Market

Abstract

This paper examines the value of political connections in the Chinese IPO market. We find a positive relationship between CEO/chairman’s political connections and the probability of IPO approval of entrepreneurial firms. We further identify that minority shareholders value those connections and give a market premium to the connected firms after the firms go public. We provide evidence that connected independent directors and PE/VC investors bring important networks which facilitate firms’ access to the IPO market, albeit the former complements and the latter substitutes the CEO/chairman’s connections. We argue that in emerging markets where government intervention is still prevalent, the value of political connections does exist and entrepreneurial firms usually build political connections through different ways in order to facilitate their access the IPO market and obtain a higher market premium.

Keywords: Political connections, IPO approval, Independent director, PE/VC

JEL Classification: G30, G38