Investor perceptions of the benefits of political connections

Fan Yang, Craig Wilson and Zhenyu Wu

International Journal of Managerial Finance, 2014, vol. 10, issue 3, 312-331

Abstract: Purpose - – The purpose of this paper is to investigate how foreign and domestic investors differ in their beliefs about the relative merits of a firm's political connections. Design/methodology/approach - – These differences are employed to explain cross-sectional variation in the previously documented premium in A-share prices relative to otherwise equivalent foreign currency denominated B-shares for Chinese firms. Findings - – Chinese domestic individual investors were excluded from owning B-shares of Chinese firms prior to February 20, 2001. The authors find that firms with more political connections have higher premiums and a smaller reduction in premiums associated with this event. Research limitations/implications - – This is consistent with domestic block holders deriving additional benefits from politically connected firms. Practical implications - – The findings also have important policy implications by showing that government can have a strong effect on the economy even without applying macro-policy tools. Social implications - – Government ownership in listed companies can result in discrepancies among classes of investors with respect to their valuations. Furthermore, the prohibition of short sales prevents arbitrage from correcting this bias, and eventually the role of the market in allocating resources efficiently is undermined. Originality/value - – The authors investigate the role of political connections as implied by the proportion of state ownership in explaining the A-share premium. Unlike previous studies that associate state ownership with political risk, the paper relates state ownership to political connections that are particularly beneficial to domestic large block shareholders. This interpretation is consistent with the findings and with previous literature on state ownership and political connections of Chinese firms.

Keywords: Political connections; A-share premium; B-share discount; Chinese stocks; State ownership (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:10:y:2014:i:3:p:312-331

DOI: 10.1108/IJMF-08-2012-0093

Access Statistics for this article

International Journal of Managerial Finance is currently edited by Dr Alfred Yawson

More articles in International Journal of Managerial Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().