Politically-Connected CEOS, Corporate Governance and Post-Ipo Performance of China's Partially Privatized Firms

Abstract

Property rules of China's partial share issue privatization have created rent-seeking incentives for politicians that may hurt the performance and corporate governance of newly listed state enterprises. The study reports that 28% of the CEOs in the sample of 617 firms are ex- or current government bureaucrats. The three-year post-IPO stock returns of the full sample underperform the market by 23%. Much of the underperformance is attributable to the firms run by politically-connected CEOs: the underperformance of firms with politically-connected CEOs exceeds those without politically-connected CEOs by 37%. Firms with politicallyconnected CEOs are more likely to appoint other bureaucrats to the management teams and boards of directors, while they appoint fewer directors with relevant professional background or prior business experience, nor any representative of minority shareholders. The presence of politically-connected CEOs is related to the unemployment and fiscal conditions of the firms' regions while unrelated to most firm characteristics. Overall, the results indicate that the appointment of politically-connected CEOs does not enhance firm efficiency but rather fulfill political goals of politicians.