Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China

Joseph D. Piotroski and Tianyu Zhang

Journal of Financial Economics, 2014, vol. 111, issue 1, 111-136

Abstract: This paper shows that incentives created by the impending turnover of local politicians can accelerate the pace of initial public offering (IPO) activity in certain politicized environments. Focusing on China, we exploit a research setting where politicians are rewarded for capital market development, firms rely on political connections for access to capital, rent-seeking behavior is rampant, and the objectives of the state might not be to maximize capital market efficiency. We find that the rate of exchange eligible firms engaging in an IPO temporarily increases in advance of impending political promotion events. This effect holds for both state-owned and non-state-owned entities. For state-owned firms, the effect is strongest in those provinces where the politicians are more likely to be rewarded for market development activity. For non-state-owned firms, the temporary increase in IPO activity appears to be (rationally) opportunistic in nature, with the effect stronger around events more likely to disrupt the firms' political connections. Promotion period IPOs underperform non-promotion period IPOs in terms of both future financial performance and long-run stock returns, have controlling shareholders who retain a larger fraction of the company, and are more likely to divert proceeds away from their intended use after the offering.

Keywords: Political promotion; Initial public offering; Privatization; Political connection; China (search for similar items in EconPapers)
JEL-codes: D72 D78 G32 G34 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (172)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:111:y:2014:i:1:p:111-136

DOI: 10.1016/j.jfineco.2013.10.012

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