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Government intervention in the capital allocation process: Excess employment as an IPO selection rule in China

Anders Johansson (), Danglun Luo, Johanna Rickne () and Wei Zheng

China Economic Review, 2017, vol. 44, issue C, 271-281

Abstract: We study the role of excessive employment as a selection criterion for initial public offerings (IPOs) in China. Using a large dataset of firms that are eligible for a public offering, we find that firms' that have more excess employment – that is, firms that hire too many people – are more likely to be selected for an IPO. This correlation is stronger for the private sector than for the state sector, suggesting that stock market capital is used to direct capital flows to private firms that comply with politicians' preferred labor practices. A third set of results corroborates the inefficiency of this selection rule by showing that firms with more excess labor underperform after the IPO. We conclude that a political system known for its interventionistic government policies uses its influence over the stock market to signal preferred employment practices.

Keywords: Local government; Initial public offering; Labor market; Excess labor; Capital allocation; China (search for similar items in EconPapers)
JEL-codes: D72 E24 G32 G34 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:44:y:2017:i:c:p:271-281

DOI: 10.1016/j.chieco.2017.05.002

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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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