Double Political Connections And M&A Premium

In previous studies on political connection, most of the scholars have been focused on the private enterprises as the research object by analyzing the certain behavior of them that they intended to hire former officials or positively encourage their executive to join in political activities in order to build connection with the government and the influence of this behavior on the investing, financing, operating performance, enterprise value, etc. of the private enterprises and have drew many useful conclusions. A small part of scholars explores the impact of the political relationship when the government plays a leading role in the certain relationship based on the theory of supporting hand and grabbing hand. In the study of merger premium, scholars have explained the reasons of the presence of merger premium from different perspectives and explored the factors that influence the merger premium paid by the buyer, including finance, corporate governance, and many other factors. This paper will be the first to answer the question "whether the political collection of the enterprise influences the merger premium paid during acquisitions" by reviewing previous studies and analyzing the relevant theories to establish the link between political connection and merger premium.In this paper we will start from the political connection and according to the direction the leading role of different political connections, they will be divided into government-led political connection and business-led political connection. Based on the division of political connections, we will try to study the different impact of different political connection on merger premium. The conclusions not only enriched the M&A premium influencing factors, but also provide new evidence for the impact of political affiliation on mergers and acquisitions.We use the merger premium paid in M&A events as explanatory variable of our empirical model and take government-led connection and business-led political connection as main explanatory variables of the model to examine the impact of different political connections on the M&A premium paid in M&A events. We take the degree of intervention that local governments do to businesses in their area as the metric of government-led political connection and take political backgrounds of chairman of the board, CEO and chairman of the supervisory of certain company as the metric of business-led political connection of this company. The empirical results show that government-led political connection makes positive impact on M&A premium when the buyer is a state-owned enterprise and the target company is in the same administrative region with the buyer. When the buyer is a state-owned enterprise and the target company is not in the same administrative region, government-led political connection of the buyer makes negative impact on M&A premium. And when the buyer is a private enterprise, the business-led political connection of the buyer makes positive impact on M&A premium. Afterwards, we find that business-led political connection makes no significant impact on state-owned enterprises and government-led political connection makes no significant impact on private enterprises.On the construction of the sample, we choose the M&A events occurred in2003to2012on our A-share market equity in which the target of transaction is equity of the target company. Based on the nature of ownership and the geographical scope in which the M&A events happened, we divide the samples to three groups:M&A events started by state-owned enterprises in the same administrative region, M&A events started by state-owned enterprises in other administrative region and M&A events started by private enterprises and regress the samples separately based on the grouping.