A Study On The Impact Of Political Connection On Chinese Acquirer Performance In Cross-Border Mergers And Acquisitions

The number of cross-border mergers&acquisitions (CBMA) of Chinese acquirers has grown quickly in recent years. For example, Lenovo’s acquisition of IBM in2004, Jili’s acquisition of Volvo in2010and CNOOC’s acquisition of Nixon in2012, all of which gained the world’s attention, In contrast to developed countries, China’s particular economic and policy environment means that domestic political factors substantially influence the character of the CBMA activities of Chinese acquirers. Previous studies have investigated the effect of government ownership, which can be regarded as a type of political connection, on Chinese acquirers’CBMA performance. However, these studies arrived at quite different conclusions.This study use an index of political connection to depict the relationship between the firms and the government instead of the government ownership, to study the impact of firm’s political connection on its CBMA performance from a more comprehensive perspective. This study analyzed the theoretical mechanism of the impact of Chinese acquirer’s political connection on CBMA performance. Based on the theoretical mechanism, the author studied the impact channel of political connection on CBMA performance and the determinant of the impact results through empirical research and then explained the conflicting conclusions obtained in the previous literature. What’s more, as the outward foreign investment policy of the Chinese government changes substantially during the period of this study, the author analyzed the impact of policy changes on the relationship between political connections and CBMA performance from a dynamic perspective.In the section of theoretical study, the author constructed a mathematical model to describe the theoretical mechanism of the impact of political connection on investment efficiency based on the principal-agent theory and the information asymmetry theory. The study indicated that firm’s political connection alleviated the information asymmetries between the firm and the outsider investor, reduced firm’s cost of external financing and then affected firm’s investment efficiency. It is also indicated that as the agent problem, both positive and negative cases exists in the impact results of political connection on CBMA performance.By combining the mathematical model and the institutional background of Chinese acquirer’s CBMA, this study proposed a theoretical framework of impact of political connection on CBMA performance. Political connection affects CBMA performance through increasing the rate of the government’s approval on the CBMA projects, providing the acquirers preferential policies and offering implicit financial guarantee for the acquirers. External institution environment and the internal corporate governance determine the results of the impact.In the section of empirical study, using a relatively complete sample of CBMA with Chinese acquirers from January2002to March2012, the author studied the effect of Chinese acquirers’ political connections on their CBMA performance of both short-term and long-term. As the result, Chinese acquirers’ political connections do not simply have a positive or negative effect on their M&A performance and the external institutional environment and the internal corporate governance determine the relationship between these two factors. When political connections are held constant, the better the external institutional environment and the internal corporate governance, the higher the performance of acquirers will be. The empirical study also demonstrates the external institutional environment influence the impact results of political connection on short-term market performance of CBMA and both the external institutional environment and the internal corporate governance influence the impact results of political connection on long term financial performance of CBMA.The author studied other factors that affect the relationship between the political connection and acquirer’s CBMA performance by grouping regression. The results show that state-owned acquirers, high-growth acquirers and high turnover acquisitions are more susceptible to political connections.The last but not the least, the author studied the contributions of political connections to changes in Chinese acquirers’ CBM A performance when the external policy environment changed after the ’Go Global’ strategy was accelerated in2008 using the Blinder-Oaxaca decomposition. The study found that after the acceleration of the’Go Global’strategy in2008, the number of Chinese enterprises engaging in CBMA increased, while their average performance declined in both short-term and long-term. The launch of more fiscal and financial incentives expanded the negative impact of political connection on CBMA performance through the channel of preferential access to bank financing. In addition, the external institution environment got worse due to the increased rent-seeking by government officials, which also contributed to the decline in CBMA performance. What’s more, the improvement of acquirers’ internal corporate governance mitigated the decline of CBMA performance.