Do Political Connections Matter in Accessing Capital Markets? Evidence from China
39 Pages Posted: 5 Apr 2015 Last revised: 9 Oct 2015
Date Written: October 8, 2015
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: Suggested Citation