Political Connections And Valuation Differences In China Capital Market

In the perfect capital market,there is only one price,which is determined by the expected future cash flow and risk level.Stock prices in the market is unbiased estimation based on all the available information on the present value of the future cash flow,but the market is not perfect,such as transaction cost,information Asymmetry may lead to different prices for the same asset,namely multiple valuation.China’s capital market obviously has valuation differences,before the reform of non tradable shares,the nature of equity lead to market segmentation,forming state-owned,state-owned legal person shares’ market and circulation stock market;after the reform,the size of funds and limited access lead to segmentation,Pre-IPO market and the public capital market;listed companies’ choice or contract’s constrains leads to segmentation and get the private placement of stock market and the public capital market,obviously are different capital markets,make valuation differences.The study takes the risk investment institutions to obtain equity of listed companies on the Pre-IPO market and the public market as the research object,usually,the asset pricing literature take the mature capital market as the research object,consider the influence of system risk,tax,liquidity constraints,investment behavior and preferences and other factors on asset pricing,this thesis studies whether political association plays a role in China capital’s pricing based on the above literatures,and political connections how to affect IPO valuation and the cost of equity capital.First,the study examines the effect of political connection in the venture capital institutions and small investors investment cost,make the depth analysis in the influence of political connection of different property rights of executives on the valuation differences,and the relationship between the reduction of venture capital institutions and political association,venture capital institutional investors made equity prices far below small investors’,After control the time value of money and IPO lock liquidity discount,the study found that the political relationship and valuation differences has significant correlation,VC’s valuation differences between the political reduction ratio was significantly higher than that of non political association of venture capital institutions.VC involvement by the investment company has been obtained the cost of equity on the price far below the market price.After brief training,help companies successful IPO.At this time political rent-seeking make the listed company overvaluation,Just after small and medium-sized investors took the shares,venture capital institutions reduces the equity after the IPO lock period,at that time the price earnings ratio has not yet down to the average,and the price earnings ratio higher reduction ratio,the reduction of the greater number,reducing to the waiting period is shorter.For their own benefit maximization,venture capital firms have the incentive to use their information advantage to sell holdings of shares when the company’s value is overvalued.Through our research,we should pay attention to the regulatory authorities,to extend the sale period,to strengthen the market restraint,to protect the interests of small investors,to build a healthy and sustainable development of the capital market.Secondly,IPO price overvaluation and the reduction of the large shareholders and the executives are damages of market justice and efficiency.They not only grab the interests of small investors,but also affect the efficiency of resource allocation.What is the reason of high price-earnings ratios,high issue price,and high raise funds,which we called ―three high‖ phenomenons? However,who are the IPO overvaluation beneficiaries? This study makes a theoretical analysis and empirical examination.The auther constructed a model of stock valuation based on historical accounting data with Olhson and GLS model combined.Using this model,the auther estimate the intrinsic value of the stock and the IPO price deviation rate.It provides a benchmark to measure IPO valuation bubble and a reasonable method to study the relationship between political connections and IPO pricing.Based on the date of the Small and Medium-Sized Enterprises Board of our country,empirical results show that: the IPO price of Chinese private listed firms is higher,political connections significantly increase the IPO price.In other words,the larger proportion of board numbers,the higher the IPO pricing.These findings help us evaluate fairness,efficiency and influencing factors of Chinese stock market,and they are references to assess the listing and delisting system.Finally,The study make an empirical examination on how to affect the cost of equity capital and the welfare implications of political connections.The results show that after controlling for known factors which affect the cost of equity capital,there is a significant negative correlation between the cost of equity capital and the political connections,the political ties more closely between IPO companies and the public sector,the lower the cost of equity capital.This means that,on the one hand,the expected rate of return to investors will be significantly lower,which will reduce the welfare of investors;On the other hand,it will greatly overestimate the NPV of IPO company’s physical investment when the cost of capital is reduced due to political connections,it will lead to inefficient use of scarce capital,then reduce resource allocation efficiency of the real economy.These findings show that the further problems for the regular department to solve is how to improve the listing and delisting system,promote the increase of social justice and social welfare.