Does Political Capital Create Value in the IPO Market? Evidence from China

27 Pages Posted: 9 Sep 2014

See all articles by Qigui Liu

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University

Jinghua Tang

School of Accounting and Finance

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: September 7, 2014

Abstract

This study examines the value of political capital in the Chinese IPO market. We find a positive relationship between a politically connected executive and the probability of IPO approval of entrepreneurial firms. We further identify that shareholders value those connections and give a market premium to connected firms after the firms go public. We provide evidence that other types of political capital gained through external sources, such as politically connected sponsors and PE investors, also bring benefits to the firms in their IPO approval, and these connections substitute for the effect of the executive’s political connections on IPO approval. We argue that in emerging markets where government intervention is still prevalent, political capital does create value and entrepreneurial firms usually build political capital to facilitate their access to the IPO market, although other types of political capital do not bring further benefits into the post-IPO market.

Keywords: Political capital; IPO approval; Post-IPO performance; Emerging market

JEL Classification: G30, G38

Suggested Citation

Liu, Qigui and Tang, Jinghua and Tian, Gary Gang, Does Political Capital Create Value in the IPO Market? Evidence from China (September 7, 2014). Journal of Corporate Finance, Vol. 23, 2013. Available at SSRN: https://ssrn.com/abstract=2492707 or http://dx.doi.org/10.2139/ssrn.2492707

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University ( email )

Hangzhou, Zhejiang Province 310058
China

Jinghua Tang

School of Accounting and Finance ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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