Political Alignment and the Allocation of Stock Market Resources in China

Abstract

Earlier research shows that national leaders often distribute public resources to advance their private interests. This line of research often assumes that subnational governments are merely passive receivers of the central government's distributive policies. We question this view by studying how intergovernmental relations between cities and provinces affect the allocation of opportunities for initial public offerings (IPOs) in China. Although the China Securities Regulatory Commission (CSRC) is the only central agency that reviews IPO applications based on efficiency criteria, our analysis of IPO applications between 2004 and 2016 shows that provinces can help politically aligned cities obtain more IPOs. Further results based on a novel dataset on the CSRC's justifications for rejections show that provincial governments influence the CSRC's decision by hiding unfavorable information from the CSRC if the applicant's mayor is politically aligned with the province. These IPO approvals, in return, improve mayors' promotion prospects.

Keywords: Bureaucracy, China, Distributive Politics, Initial Public Offering, Political Alignment, Stock Market