Do Political Connections Matter in Accessing Capital Markets? Evidence from China

39 Pages Posted: 5 Apr 2015 Last revised: 9 Oct 2015

See all articles by Xiaolu Bao

Xiaolu Bao

Kobe University

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Kenji Kutsuna

Kobe University - Graduate School of Business Administration

Date Written: October 8, 2015

Abstract

This study analyses the influence of political connections on firms’ access to capital markets and the ensuing effect on the cost of raising capital. Using a dataset of 413 initial public offering issuances on ChiNext from 2009 to 2012, we exploit a research setting where government is still highly involved with the stock market; the China Securities Regulation Committee has the authority to reject initial public offering (IPO) applications. In this context, firms rely on political connections to reduce IPO rejection risk. Results suggest that a firm’s political connections are positively associated with the propensity of obtaining approval for an IPO by the China Securities Regulation Committee. With the reduction in IPO rejection risk, we further find political connections are negatively associated with the cost of initial public offering. Furthermore, the connected firms appear to perform better subsequent to their IPOs.

Keywords: IPO; Political connection; Start-ups; China; capital market regulation

JEL Classification: G15

Suggested Citation

Bao, Xiaolu and Johan, Sofia A. and Kutsuna, Kenji, Do Political Connections Matter in Accessing Capital Markets? Evidence from China (October 8, 2015). Available at SSRN: https://ssrn.com/abstract=2590170 or http://dx.doi.org/10.2139/ssrn.2590170

Xiaolu Bao

Kobe University ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501
Japan

Sofia A. Johan (Contact Author)

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Kenji Kutsuna

Kobe University - Graduate School of Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501
Japan

HOME PAGE: http://www.b.kobe-u.ac.jp/en/staff/kutsuna.html

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