Political Connection, Ownership Structure And Post-IPO Long Term Performance

This paper investigates the relationship between incremental reform and extreme IPO underpricing, the effects of political connections of senior executives and the deviation of controlling shareholders on Post-IPO long term returns based on Chinese firms listed on Shanghai and Shenzhen stock exchanges.First, we review the process of institutional reform in Chian’s IPO market. There are still some market distortions in China and IPO underpricing is up to181.6%on average during the past two decades. With theoretical analysis of supply and demand and empirical tests, our paper finds that the incremental reform made by the government can significantly reduce the degree of IPO underpricing. Relaxing the government control of supplies and pricing of new shares, the incremental reform is market-oriented and thus it is effective. In a nutshell, institutional change of primary market can promote financial development.Second, using the sample of561firms listed on shanghai and Shenzhen stock exchanges in China from2001to2008, Developing Fan et al.(2007), we examine the effects of political connections in firms with different types of controlling shareholders on post-IPO long term performance. We find that political connections actually bring about better post-IPO performance in the long term in the firms controlled by the family shareholders, but not in the government-controlled firms. We further find that political connections in family-controlled firms are associated with better access to bank loans and tax rebates. We argue that political connections can be a substitute for property protection and even be a channel for government patronage under poor institutional environment.Third, we also investigate the influences of the deviation between control right and cash flow right of government-controlled and family-controlled firms sorted by types of the ultimate controlling shareholders on post-IPO long term returns. It is found that the divergence between control rights and cash flow rights has a negative effect for family-controlled firms, but the effects of deviation of cash flow rights from control rights is insignificant in government-controlled firms. The result is not fully consistent with Claessens et al.(2002) and Fan et al.(2013). Further, we document controlling shareholders in family-controlled firms expropriate other investors through such main channels as related party transaction, intercorporate loan, and capitial expendicture. In addition, it is evidenced that tunneling and moral hazard by controlling shareholder in family-controlled firms can be ameliorated through corporate governance mechanisms, such as managerial shareholding, managerial payment, analyst number following the IPO, and power balance.