Zhang Et Al (2021)

Research in International Business and Finance 59 (2022) 101561
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Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf
Full length article
Corporate ownership and political connections: Evidence from

post-IPO long term performance in China
Wei Zhang a, b, Xiong Xiong a, Guanying Wang a, *, Chunxia Li c
a
College of Management and Economics, Tianjin University, Tianjin, 300072, China
b
Coordinated Innovation Center for Binhai Finance in China, Tianjin University of Finance and Economics, Tianjin, 300222, China
c
Laboratory for Fintech and Risk Management, Tianjin University of Finance and Economics, Tianjin, 300222, China
A R T I C L E I N F O A B S T R A C T
Keywords: This paper constructs a practical framework to illuminate how political connections influence the
Political connection material performance of initial public offerings (IPOs) for Chinese firms. An important dimension
Post-IPO long-term performance of the paper is to decompose the effects of political connections into three types: (i) policy bur
Investor protection
dens, (ii) investor protection, and (iii) government patronage, ascribed to the grabbing hand, the
Government patronage
invisible hand, and the helping hand, respectively. We find that the positive effect of political
connections on the long-term performance of family-controlled firms, is attributed to investor
protection and government patronage. The lack of significant effect of political connections on
state-controlled firms is due to the offsetting of policy burdens and government patronage. We
also find political connections to have a significantly positive effect on IPO initial returns for
state-controlled firms, but just a moderate effect for family-controlled firms. This study offers
deep insight to policy makers into the effect of political connections on IPO long-term
performance.
1. Introduction
Political connections are thought to be pervasive worldwide, and are increasingly recognized as imposing complex economic
consequences (Shleifer and Vishny, 1998; Faccio, 2006; Faccio et al., 2006; Fan et al., 2007; Azevedo et al., 2018; Gao et al., 2019;
Chahine et al., 2020). Despite the abundant literature, an analysis framework to explore the effects of political connections on firm
performance is lacking. This study therefore identifies three types of channels through which political connections influence the
long-term performance of Chinese listed firms. In China, the government, as a controlling shareholder, tends to appoint
government-affiliated individuals as top executives or board directors to foster connections with the state. Similarly, family-controlled
firms set up their political ties through recruiting retired government officials as board members, or gaining membership in the Na
tional People’s Congress (PC) or the Chinese People’s Political Consultative Conference (PPCC). However, political ties have different
influences on economic performance. Corporate ownership can thus be an important determinant of the relation between political
connections and post initial public offering (IPO) long-run performance (Allen et al., 2005; Fan et al., 2007; Chen et al., 2011a;
Azevedo et al., 2018). To consider this specific context, we construct a practical framework that includes policy burdens, investor
protection, and government patronage to explore the channels through which political connections influence firm behaviors and
* Corresponding author.
E-mail addresses: cheungtufe@126.com (W. Zhang), xxpeter@tju.edu.cn (X. Xiong), guanying.wang@tju.edu.cn (G. Wang), chunxiali@tjufe.edu.
cn (C. Li).
https://doi.org/10.1016/j.ribaf.2021.101561
Received 20 August 2020; Received in revised form 26 September 2021; Accepted 2 October 2021
Available online 9 October 2021
0275-5319/© 2021 Elsevier B.V. All rights reserved.
W. Zhang et al. Research in International Business and Finance 59 (2022) 101561
market value in state- and family-controlled firms.

This study pays significant attention to political connections. Previous studies show that political connections help promote firm
performance and value (Khwaja and Mian, 2005; Faccio, 2006), especially in regions with poor investor protection or where
market-oriented institutions are less developed (Bai et al., 2006; Djankov et al., 2006; Chen et al., 2011a). Specifically, political ties
entitle firms to certain advantages over their unconnected peers, such as better access to bank loans, tax rebates, and subsidies (Khwaja
and Mian, 2005; Faccio, 2006; Faccio et al., 2006; Wu et al., 2012). Other studies note that political connections also facilitate
government rent-seeking behaviors, distort the allocation of economic resources, and can decrease firm value (C Shleifer and Vishny,
1998). Faccio et al. (2006) and Boubakri et al. (2008) argue that politically connected firms perform worse financially than their
nonconnected counterparts.
This study focuses on the influence of political connections in the Chinese context. Previous studies have also documented the
presence and outcomes of political connections (Fan et al., 2008; Li et al., 2008; Chen et al., 2011b; Conyon et al., 2015). However, the
impact of political connections on firm performance around IPOs is less studied, an exception being the study of Fan et al. (2007). Fan
et al. (2007) document that firms with politically connected chief executive officers (CEOs) significantly underperform those without
political connections by almost 18 %, and their three-year accounting performance is poorer than that of their unconnected
counterparts.
This study addresses two main issues: whether political connections play different roles in firms with different types of ownership
and, if so, what the channels of political connections are. To answer these issues, we first investigate the relation between political
connections and stock-based indicators in state- and family-controlled firms. We find political connections have a positive effect on
long-term performance in family-controlled firms. For state-controlled firms, political connections have a nonsignificant effect on long-
term returns. We also investigate the effects of political connections on IPO initial returns. The evidence shows political connections
have a significant and positive effect on IPO underpricing and short-term returns in state-controlled firms, but only a modest effect in
family-controlled firms.
Second, we propose and examine three conceptual effects of political connections, policy burdens, investor protection, and gov
ernment patronage. We find that, first, political connections can help the government impose more policy burdens on state-controlled
firms, while they do not evidently induce family-controlled firms to undertake greater policy burdens. We consider the policy burden
effect of political connections as the grabbing hand of the government (Shleifer and Vishny, 1998). Second, the political connections of
family-controlled firms can substitute for the protection of private property in a weak institutional environment, whereas no such
relation exists in state-controlled firms. The investor protection effect of political connections is treated as the invisible hand of the
government (Fry and Shleifer, 1997). Third, political connections lead state- and family-controlled firms to obtain more government
preferential treatments (e.g., more bank loans, longer loan maturity, and tax rebates). Government patronage of political connection is
considered the helping hand of the government (Fry and Shleifer, 1997).
This study contributes to the literature in several ways. First, regarding corporate ownership, we enrich the literature on political
connections (Shleifer and Vishny, 1994; Faccio, 2006; Fan et al., 2006), and expand the seminal study of Fan et al. (2007). Shleifer and
Vishny (1998), and Fan et al. (2007) show that political connections reduce the corporate value of state-owned enterprises (SOEs),
while Faccio (2006) and Chen et al. (2011a) document that political connections increase the corporate value of private firms. Our
results show that corporate value is not only related to political connections, but also associated with corporate ownership.
Comprehensively considering the effects of political connections on post-IPO long- and short-term returns, we also find time-variant
effects of political connections to be due to corporate ownership. This result contributes to the ongoing debate on the role of political
connections in emerging markets and, by including corporate ownership, reconciles the mixed evidence for the effects on political
connections on firm performance by including corporate ownership.
Second, this study constructs a new framework to identify channels through which political connections influence corporate value.
To this end, we gradually analyze the mechanisms of political connections and propose the presence of policy burdens, investor
protection, and government patronage to explore the presence of political connections on firm value. The policy burdens effect of
political connections empirically verifies the results of Lin et al. (1998) and Lin and Tan (1999) from a micro-perspective. We provide
empirical evidence that government bureaucrats use corporate resources, especially those imposing policy burdens on SOEs, to pursue
their political and economic policy objectives. The effect of political connection on institutions supports the works of Bai et al. (2006)
and Chen et al. (2011a), and echoes the conjecture of Allen et al. (2005). As for state-controlled firms, government ownership can
complement political connections to influence corporate behaviors, because state-controlled firms are politically oriented, regardless
of whether their top executives are connected or not (Wu et al., 2009). Finally, the government patronage effect of political con
nections enriches the research of Khwaja and Mian (2005); Faccio (2006); Fan et al. (2008), and Wu et al. (2012).
Third, we argue that none of the grabbing, invisible, or helping hands can explain the behavior of governments exclusively, and the
effects of political connections on corporate value depend on the combined action of the three hands. The positive effect of political
connections on the long-term performance of privately-controlled firms is attributed to the invisible and helping hands, whereas the
nonsignificant effect of political connections in state-controlled firms is due to the offset of the helping and grabbing hands. Moreover,
this study contributes to complicacy of political rent seeking and government intervention (Murphy et al., 1993; Shleifer and Vishny,
1993; Ehrlich and Lui, 1999). We argue that the policy burden effect harms fair competition between SOEs and private firms, the
investor protection effect promotes fair competition between SOEs and private firms, and the government patronage effect distorts
resource allocation and creates unfair competition between politically connected and nonconnected firms.
The remainder of the paper is organized as follows. Section 2 proposes research hypotheses. Section 3 introduces our data and
sample. Section 4 presents baseline empirical results and robustness tests. Section 5 empirically analyzes the relation between political
connections and IPO initial returns. Section 6 examines three mechanisms of political connections in state- and family-controlled firms.
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Section 7 investigates the relation between politically connected chairpersons and firm economic performance. The final section
concludes the paper.
2. Hypotheses on political connections
There have been growing concerns regarding rent seeking and government intervention in numerous studies, such as those of
Murphy et al. (1993); Shleifer and Vishny (1994, 1998), and Acemoglu and Verdier (2000). Three models of government bureaucrats
and entrepreneurs (i.e., the grabbing hand, the invisible hand, and the helping hand) are therefore developed to demonstrate the
effects of political rent seeking on firm value. The grabbing hand conjectures that political rent seeking by government officials is
detrimental to firm value (Shleifer and Vishny, 1994, 1998). The invisible hand assumes that political connectedness does not in
fluence firm value because governments provide basic public goods, such as enforcement contracts, law and order, and regulations,
while leaving most resource allocation decisions to the market mechanism (Frye and Shleifer, 1997). Moreover, the helping hand
implies that political connections are involved in promoting firm performance (Khwaja and Mian, 2005; Faccio, 2006). Obviously,
there is no agreement on the effects of political connections on firm value. The degree to which political connectedness is a primary
determinant of firm value depends on the synthesized effect of the three hands. Therefore, we propose three testable hypotheses for
policy burdens, investor protection and government patronage, in terms of the grabbing, invisible, and helping hands, respectively.
2.1. Policy burdens
The past two decades have witnessed massive waves of partial privatization for Chinese companies. The Chinese government plays
a vital role in business activities through majority ownership in new and partial spin-offs (You and Du, 2012). State shareholders
perform as government bureaucrats rather than real owners. They tend to utilize listed SOE resources to pursue social or political
objectives instead of maximizing financial performance. Therefore, SOE shareholders are forced to subscribe to the government ob
jection function, and have few choices under such circumstances, but take on a heavy burden from retirement pensions, other
social-welfare costs, and redundant workers (Lin et al., 1998). The SOEs retain redundant employees and invest in non-profitable social
or policy projects, which results in financial losses. Ultimately, the government becomes responsible for SOE losses that result from
policy-determined burdens. However, because it is difficult to distinguish policy-induced losses from operational ones, SOEs may
ascribe all their losses to government policies (Lin and Tan, 1999). Consequently, policy burdens imposed on SOEs by the government
result in soft budget constraints, further worsening financial performance and harming production efficiency.
Besides, the bewildering political revolving door between government bureaucrats and SOEs’ top executives further blurs the
boundary between governments and enterprises. For example, Su Shulin, the former governor of Fujian province, was the former
general manager of Sinopec Group from June 2007 to March 2011, and the standing member of the Municipal Committee and Minister
of Organization of Liaoning province from June 2006 to September 2007. Therefore, government bureaucrats are motivated by self-
interest, and use SOE resources for political promotion (Shleifer and Vishny, 1994). Chen et al. (2005); Li and Zhou (2005) and
Piotroski and Zhang (2014) present the evidence that provincial bureaucrats’ promotion hinges on provincial economic performance,
meaning that government bureaucrats, for their political goals, will employ firms, either politically connected firms or SOEs, to un
dertake policy-determined burdens. Borisov et al. (2021) examine the effect of going public on firm-level employment, and document
significant employment increases after going public (Johansson et al., 2017; Chen et al., 2021c). Politically connected top executives
from SOEs who pay close attention to career objectives such as political power or future promotion in the bureaucratic system, are
more eager to carry out government policies and agendas, which distorts investment behavior and harms firm efficiency (Chen et al.,
2011b).
Compared with policy burdens for the pursuit of political and economic objectives in state-controlled firms, the political con
nections of family-controlled firms do not aim to take on policy burdens or promote political careers. Therefore, their political con
nections could be associated with lower policy burdens, because central and local governments at all levels always impose greater
policy burdens on firms without political connections. We therefore propose the following hypothesis.
H1. The political connections of state-controlled firms are positively associated with policy burdens, whereas the political connections of
family-controlled firms are related to lower policy burdens.
2.2. Investor protection
La Porta et al. (2002) point out that investor protection in a country is an important determinant of financial market development.
Comparatively, the Chinese capital market, featuring excessive government intervention, a weak legal system, poor law enforcement
and high entry barriers, is far from perfect. Private property rights are insecure, creating concern, and provide insufficient incentives
for entrepreneurs (Djankov et al., 2006). However, China has achieved great economic progress, appearing to challenge the formal
law-finance-growth nexus established in the literature (La Porta et al., 1998, 2002).
Compared with SOEs, private firms use gift-giving or other resources more extensively to build political ties with government
bureaucrats when property rights are not perceived as secure (Xin and Pearce, 1996). Allen et al. (2020) focus on the institutional
features of the markets in China to explain the poor performance of listed firms in the Chinese domestic market. Allen et al. (2005)
conjecture that alternative governance mechanisms, such as those based on reputation and relationships, support the growth of the
private sector. Indeed, it is China’s relationship-based culture that pushes private firms to seek out informal institutions to protect their
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Table 1
Definition of variables.
Variables Definition
CAR_MNTHi The i months cumulative abnormal stock returns from second month after IPO, adjusted by equally-weighted returns of
Shanghai and Shenzhen Stock Exchange, i = 12, 24, 36.
CAR_DAYi The i days cumulative abnormal stock returns from second day after IPO, adjusted by equally-weighted returns of Shanghai and
Shenzhen Stock Exchange, i = 20, 40, 60.
IR Raw IPO first-day return, calculated as first-day price minus offering price divided by offering pricing.
Adj.IR Market-adjusted IPO first-day return, calculated as raw IPO first-day returns minus the compound returns of Shanghai and
Shenzhen Stock Exchange.
ROA_PREIPO The average return on assets over 3 years prior to the IPO.
ROE_PREIPO The average return on equity over 3 years prior to the IPO.
ROS_PREIPO The average return on sales over 3 years prior to the IPO.
ROA The change in return on assets, calculated as the change of average return on assets over 3 years prior to the IPO to the 3 years
after the IPO.
ROE The change in return on equity, calculated as the change of average return on equity over 3 years prior to the IPO to the 3 years
after the IPO.
ROS The change in return on sales, calculated as the change of average return on sales over 3 years prior to the IPO to the 3 years after
the IPO.
EARNINGS The percentage of the average earnings over 3 years prior to IPO to 3 years after IPO, where earnings are scaled by industry
median.
POL Political dummy variable equals to 1 if the chairpersons who do not hold the CEO post have working experiences serving the
government or the military, or are former or current members of PC (the National People’s Congress) or PPCC (Chinese People’s
Political Consultative Conference), and 0 otherwise.
POL_GOV_FORM The dummy variable equals to 1 if the chairpersons who do not hold the CEO post are former officials of the government or the
military, and 0 otherwise.
POL_GOV_CURR The dummy variable equals to 1 if the chairpersons who do not hold the CEO post are current officials of the government or the
military, and 0 otherwise.
POL_PC_PPCC The dummy variable equals to 1 if the chairpersons who do not hold the CEO post are the members of PC or PPCC, and
0 otherwise.
POL_CEO The dummy variable equals to 1 if the CEOs who do not also hold the chairman post have working experiences serving the
government or the military, or are former or current members of PC or PPCC, and 0 otherwise.
POL_CHAIR_CEO The dummy variable equals to 1 if the CEOs or chairpersons have working experiences serving the government or the military,
or are former or current members of PC or PPCC, and 0 otherwise.
POL_DUAL The dummy variable equals to 1 if CEOs and chairpersons both have working experiences serving the government or the
military, or are former or current members of PC or PPCC, and 0 otherwise.
POL_MGT The dummy variable equals to 1 if the managers have working experiences serving the government or the military, or are former
or current members of PC or PPCC, and 0 otherwise.
POL_BOARD The dummy variable equals to 1 if the directors of board have working experiences serving the government or the military, or
are former or current members of PC or PPCC, and 0 otherwise.
LEV Financial leverage ratio, calculated by debt-to-asset ratio of firms in the IPO year.
LARGEST Percentage of largest shareholding in the IPO year.
TA Natural log of total asset.
MKT_BK Market-to-equity ratio measured by market value over book value in IPO year.
REGT Regulatory industry dummy variable equals to 1 if the firm is in heavily sector (natural resources, public utilities, and real
estate), and 0 otherwise.
YEARi Year dummy variables, i = 1, 2, …, 13.
INDUSTRYi Industry dummy variables, i = 1, 2, …, 40. We utilize 2012 CSRC (China Securities Regulatory Commission) classifications
because of the change of industry classification standard in 2012, where the manufacturing industry employs secondary-
industry classification and the others use first-industry classification.
EMP11,EMP12, EMP21, EMP22 EMP11 (EMP21) is total employment excluding retired persons divided by total assets (sales). EMP12 (EMP22) is total
employment including retired persons divided by total assets (sales).
EXEMP11, EXEMP12, We employ the following model to calculate excess employment.
∑ ∑
EXEMP21, EXEMP22 EMP=α0+β1Size+β2Lev+β3ROA+β4Growth+β5PPE+ βiIndi+ βjYrj+ξ, where, EMP represents EMP11, EMP12, EMP21, and
EMP22, Size is the natural log of total assets, Lev is financial leverage measured by liability to total assets, ROA is net return on
total assets, Growth is growth rate of sales, PPE is capital-intensity measured by net fixed assets divided by total assets, Indi and
Yrj are the industry and year dummies, and ξ is the residual. The differences of actual values over fitted values in the above
model, which are greater than zero, are employed as EXEMP11, EXEMP12, EXEMP21, and EXEMP22, respectively.
COST_TA, COST_SALE Labor cost COST_TA (COST_SALE), measured by cash paid to employee and for employee in yearly cash flow statement, divided
by total assets (sales).
TOTAL_LOAN Long term bank loan plus short term loan divided by total assets.
LOAN_TERM Percentage of long term loan over total loans.
TAX_DUM The tax preference dummy equal to 1 if real tax rate is smaller than 33 % before 2007 or if real tax rate is smaller than 25 % after
2007, and 0 otherwise. China tax authorities levy 33 % income tax rate on domestic enterprises before 2007, while at 25 % after
2007.
TAX_DIFF The difference between real tax rate and China tax authorities levy, equal to (0.33-real tax rate) before 2007 and (0.25-real tax
rate) after 2007.
ETRi Effective tax rates, i = 1, 2. ETR1 is calculated as income tax expense less deferred income tax expense, and divided by EBIT.
ETR2 is defined as income tax expense divided by adjusted pre-tax accounting income.
PRIV The private property right dummy, equals to 1 if the last controlling shareholder is an individual or family, and 0 otherwise.
POL*PRIV The interaction term of the political connection dummy and the private property right dummy.
(continued on next page)
4
Table 1 (continued )
Variables Definition
PERGDP The dummy variable equals to 1 if provincial per-capita gross domestic product is lower the median of all provincial per-capita
gross domestic product in the IPO year, and 0 otherwise.
UNEMP The dummy variable equals to 1 if provincial unemployment rate is greater than the median of all provincial unemployment rate
in the IPO year, and 0 otherwise.
DEFICIT The dummy variable equals to 1 if provincial deficit is greater than the median of all provincial deficits in the IPO year, and
0 otherwise.
PORT The commercial port dummy, equal to zero if the region’s sea or inland river ports were forced open to foreigners as treaty ports
after the first Opium War in 1842 during the Qing Dynasty, and 1 otherwise.
POL*PORT The interaction term of political connection dummy and the commercial port dummy.
LEASE The leased territory dummy, equal to zero if the region leased territories to foreigners after the first Opium War in 1842 during
the Qing Dynasty, and 1 otherwise.
POL*LEASE The interaction term of the political connection dummy and the leased territory dummy.
PORT_LEASE The dummy variable, a combination of the above dummy variables PORT and LEASE.
POL* PORT_LEASE The interaction term of the political connection dummy and the combination dummy.
This table provides the definitions of the variables in this study.
property rights (Gold et al., 2002; Xin and Pearce, 1996). Political connections are just such an informal substitute for formal in
stitutions that protect private property rights from political rent seeking and government intervention (Bai et al., 2006; Chen et al.,
2011a).
Compared with family-controlled firms, the political connections of state-controlled firms cannot necessarily substitute for poor
institutions, because these firms, in which the government remains to be the largest shareholder, are born of SOEs. Political con
nections can also help bring about fair competition between state- and family-controlled firms. We therefore posit the following
hypothesis.
H2. The political connections of family-controlled firms can substitute for invest protection in weak institutional settings, whereas no such
effect of political connections exists for state-controlled firms.
2.3. Government patronage
Firms with political connections can enjoy government patronage, which is positively associated with firm outcomes. Specifically,
political relationships between the government and entrepreneurs can help enterprises gain preferential treatments, such as favorable
financing, preferential taxation, and entry into industries with high regulatory barriers, in an economy with poor market-supporting
institutions.
Politically connected firms receive substantial preferential debt-financing. Khwaja and Mian (2005) show that politically con
nected firms receive cheap loans from government banks. Moreover, firms with political connections have preferential access to
long-term debt compared to firms without such ties, and they appear to use fewer short-term loans than those without connections
(Charumilind et al., 2006; Piotroski and Zhang, 2014). Studying firms connected to Chinese corruption scandals, Fan et al. (2008)
suggest that political connections are helpful in accessing bank loans, particularly long-term ones. Political connections are also an
important determinant of favorable tax treatment in relationship-based economies (Faccio, 2006). Edwards and Todtenhaupt (2020)
examine whether a capital gains tax reduction is a meaningful measure in alleviating the financing constraints of start-up firms. Chen
et al. (2021b) provide the evidence that political appointments influence local firms’ tax planning. Wu et al. (2012) find that firms with
political connections pay taxes at significantly lower effective rates than other firms. Additionally, the political status of private firms,
increased by entrepreneurs’ political identity, can help them enter highly regulated industries (Djankov et al., 2002; Khraisha and
Arthur, 2018). For example, anecdotal evidence indicates that it was the political status of Lu Guanqiu, the chairperson and secretary
of the Communist Party of China (CPC) Committee at Wanxiang Group, and the member of the 9th, 10th, and 11th National People’s
Congress that helped Wanxiang Group obtain financial qualifications, such as securities licenses, insurance licenses, trust licenses, and
financial leasing licenses. Correspondingly, SOEs enjoy the above favorable treatments as well. We therefore posit the following
hypothesis.
H3. Political connections help state- and family-controlled firms obtain preferential treatment from the government.
3. Data and sample
Our sample includes the firms listed on the Shenzhen Small and Medium Enterprise board and the main board of the Shanghai and
Shenzhen Stock Exchanges from 2001 to 2015. The data for stock returns cover from 2001 till 2018. We manually collect political
connection data on board members and senior executives from the “directors, supervisions and senior management personnel” section
of the companies’ prospectus. If these board members or senior executives served in the central government, local governments, or the
military, as well as being former or current members of PC or PPCC, we consider them politically connected. Tax rate data are taken
from RESSET Financial and Economic database. Accounting and other data are from the China Stock Market & Accounting Research
database. Our sample only retains firms whose last controlling shareholders are the central government, local governments, in
dividuals, or families. We sort firms into state- and family-controlled firms according to the last controlling shareholders. Our final
5
1086 companies consist of 374 state-controlled and 712 family-controlled firms Table 1.
We emphasize the influence of the political connection of board chairpersons. In China, the board of directors makes operational
decisions and employs or dismisses general managers, who only implement these decisions. Chinese Company Law states that board
chairpersons convene and preside over the meetings of the board of directors and inspect its implementation of the resolutions of the
board of directors. Board chairpersons, usually a general secretary of CPC Committee, tend to have greater power than general
managers in many cases. We also account for the influence of politically connected CEOs, and our empirical results still hold.
Table 2 reports the distribution of political connections, following six classifications: (i) chairpersons, (ii) CEOs, (iii) CEO-
chairperson duality, (iv) both the chairpersons and the CEOs, (v) management, and (vi) the board of directors. The year 2013 is
cut off because of the suspension of IPOs under China Securities Regulatory Commission. In the full sample, 30.48 % of firms have a
politically connected chairperson. 12.06 % of firms have a politically connected CEO, and 11.42 % of firms have politically connected
CEO-chairperson duality. Taking chairpersons and CEOs into account, 46.32 % of firms are politically connected, and 41.90 % senior
executives and 79.10 % of firm board directors have political connections. The subsample of state-controlled firms has more politically
connected board chairpersons, CEOs, and directors, with 35.83 % connected chairpersons, 14.97 % connected CEOs, 3.74 % connected
CEO-chairpersons duality, 45.45 % connected chairpersons and CEOs, 41.98 % connected managers and 85.03 % connected board.
However, the proportions of connected chairpersons, CEOs, and directors in family-controlled firms are slightly lower, with 27.67 %
connected chairpersons, 10.53 % connected CEOs, 15.45 % connected CEO-chairpersons duality, 46.77 % connected chairpersons and
CEOs, 41.85 % connected managers and 75.98 % connected boards (Table 3).
Next, we present the share returns, the descriptive statistics, and econometric analysis to examine the relation between political
connections and post-IPO long-term performance, based on stock indicators. The variables are all defined in detail in Table 1.
4. Politically connected chairpersons and long-term firm performance
We employ stock-based measures to evaluate the post-IPO long term performance of Chinese companies in our sample. The stock
performance measures are the 12-, 24-, and 36-month post-IPO cumulative abnormal returns adjusted by the equally-weighted market
returns of the Shanghai and Shenzhen Stock Exchanges (CAR_MNTH) starting the second month after the IPO. We also use value-
weighted stock returns and industry-adjusted stock returns, and our regression results remain qualitatively similar.
4.1. Between-group mean and median tests
Figs. 1–3 illustrate the post-IPO CAR_MNTHs values, adjusted by equally-weighted market returns for one to 36 months. We sort
firms into those with political connections and those without. Fig. 1 describes the subsequent year’s change in post-IPO long term
performance during one to 36 months. The variable CAR_MNTH increases by 4.6 % for the full sample, by 6.0 % for politically
connected firms, and by 4.0 % for nonconnected firms. Generally, the long-term performance of politically connected firms is superior
to that of nonconnected firms. This evidence differs significantly from the results of Fan et al. (2007). Fig. 2 depicts an 8.7 % decrease in
the long-term returns of state-controlled firms. However, the three-year CAR_MNTH decreases by 5.8 % among politically connected
firms, and by 10.3 % among nonconnected firms. The results in Fig. 3 show that the three-year returns of family-controlled firms
increase by 11.6 %. In contrast to the 14.2 % increase in the returns of connected firms, the returns of firms without political con
nections increase by 10.6 %.
These figures clearly show that the average long-term returns of politically connected firms are better than those of nonconnected
ones in the full sample, but such results are mainly driven by family-controlled firms. However, the influence of political connections
among state-controlled firms is blurring, since corporate performance is influenced by both political connections and corporate
ownership.
Table 4 reports the 12-, 24-, and 36-month CAR_MNTH values of listed firms during the year after IPO. Panel A presents the mean
and median statistics of the stock performance measures. For firms in the full sample, the differences in the mean CAR_MNTH values
between politically connected firms and nonconnected ones are 0.055, 0.033, and 0.020 over one, two, and three years, respectively.
We find that the 12-, 24-, and 36-month CAR_MNTH values of politically connected firms are significantly higher than those of
nonconnected ones. This evidence differs from that of Fan et al. (2007).
In state-controlled firms, the means of CAR_MNTH decreases from -0.064 to -0.087 over time. The one-year CAR_MNTH of con
nected firms is higher than that of no-connected counterparts at the 10 % significance level, while the two-, and three-year CAR_MNTH
values of politically connected firms are higher but not significantly, than those of nonconnected firms. In the subsample of family-
controlled companies, the average CAR_MNTH values gradually increase from 0.070 to 0.116. The one-, two-, and three-year
CAR_MNTH values of politically connected firms are significantly higher than those of nonconnected ones. The median CAR_MNTH
values in the full sample, state-controlled firms, and family-controlled firms are the same results as means. Generally speaking, the
results in Panel A in Table 4 confirm those illustrated in Figs. 1–3.
4.2. Main regressions
The positive relation between political connections and corporate performance in Panel A in Table 4 could be affected by other
factors. Following Fan et al. (2007), we investigate the effects of politically connected chairpersons on the 12-, 24, and 36-month
CAR_MNTH in multiple regressions.
Panel B in Table 4 reports the results of ordinary least squares (OLS) regressions using 12-, 24-, and 36-month CAR_MNTHs as
6
W. Zhang et al.
Table 2
Sample distribution.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 2015 All
Panel A: The full sample

N 33 21 21 32 4 21 28 22 16 72 35 7 1 18 331
POL
% 47.83 30.43 34.43 34.04 33.33 34.43 25.69 31.88 27.12 32.29 29.17 10.61 4.17 36.00 30.48
N 13 13 11 11 2 9 13 6 8 27 13 1 1 3 131
POL_CEO
% 18.84 18.84 18.03 11.70 16.67 14.75 11.93 8.70 13.56 12.11 10.83 1.52 4.17 6.00 12.06
N 5 2 0 4 0 3 10 6 13 38 20 6 7 10 124
POL_DUAL
% 7.25 2.90 0.00 4.26 0.00 4.92 9.17 8.70 22.03 17.04 16.67 9.09 29.17 20.00 11.42
N 41 31 27 41 5 26 45 32 33 118 59 14 8 23 503
POL_CHAIR_CEO
% 59.42 44.93 44.26 43.62 41.67 42.62 41.28 46.38 55.93 52.91 49.17 21.21 33.33 46.00 46.32
N 33 25 17 32 5 26 53 29 31 109 56 14 9 16 455
POL_MGT
% 47.83 36.23 27.87 34.04 41.67 42.62 48.62 42.03 52.54 48.88 46.67 21.21 37.50 32.00 41.90
N 61 54 48 70 11 53 89 55 47 192 97 32 15 35 859
POL_BOARD
% 88.41 78.26 78.69 74.47 91.67 86.89 81.65 79.71 79.66 86.10 80.83 48.48 62.50 70.00 79.10
Panel B: State-controlled firms
N 29 19 14 16 2 11 12 7 6 14 3 0 1 134
POL
% 46.03 33.33 32.56 30.19 40.00 35.48 30.77 36.84 40.00 41.18 33.33 0.00 33.33 35.83
N 9 10 7 7 1 5 3 1 4 8 1 0 0 56
POL_CEO
% 14.29 17.54 16.28 13.21 20.00 16.13 7.69 5.26 26.67 23.53 11.11 0.00 0.00 14.97
N 5 1 0 1 0 1 1 1 1 2 1 0 0 14
POL_DUAL
% 7.94 1.75 0.00 1.89 0.00 3.23 2.56 5.26 6.67 5.88 11.11 0.00 0.00 3.74
7
N 35 26 18 21 3 13 15 8 8 18 4 0 1 170
POL_CHAIR_CEO
% 55.56 45.61 41.86 39.62 60.00 41.94 38.46 42.11 53.33 52.94 44.44 0.00 33.33 45.45
N 29 17 10 19 3 17 15 10 11 20 5 1 0 157
POL_MGT
% 46.03 29.82 23.26 35.85 60.00 54.84 38.46 52.63 73.33 58.82 55.56 33.33 0.00 41.98
N 55 46 34 42 5 28 35 17 13 31 7 2 3 318
POL_BOARD
% 87.30 80.70 79.07 79.25 100.00 90.32 89.74 89.47 86.67 91.18 77.78 66.67 100.00 85.03

Panel C: Family-controlled firms
N 4 2 7 16 2 10 16 15 10 58 32 7 1 17 197
POL
% 66.67 16.67 38.89 39.02 28.57 33.33 22.86 30.00 22.73 30.69 28.83 11.11 4.17 36.17 27.67
N 4 3 4 4 1 4 10 5 4 19 12 1 1 3 75
POL_CEO
% 66.67 25.00 22.22 9.76 14.29 13.33 14.29 10.00 9.09 10.05 10.81 1.59 4.17 6.38 10.53
N 0 1 0 3 0 2 9 5 12 36 19 6 7 10 110
POL_DUAL
% 0.00 8.33 0.00 7.32 0.00 6.67 12.86 10.00 27.27 19.05 17.12 9.52 29.17 21.28 15.45
N 6 5 9 20 2 13 30 24 25 100 55 14 8 22 333
POL_CHAIR_CEO
% 100.00 41.67 50.00 48.78 28.57 43.33 42.86 48.00 56.82 52.91 49.55 22.22 33.33 46.81 46.77
N 4 8 7 13 2 9 38 19 20 89 51 13 9 16 298
POL_MGT
% 66.67 66.67 38.89 31.71 28.57 30.00 54.29 38.00 45.45 47.09 45.95 20.63 37.50 34.04 41.85
N 6 8 14 28 6 25 54 38 34 161 90 30 15 32 541
POL_BOARD
% 100.00 66.67 77.78 68.29 85.71 83.33 77.14 76.00 77.27 85.19 81.08 47.62 62.50 68.09 75.98
This table presents information on the sample of initial public offering (IPO) firms by year of IPO in China during 2001− 2015. The year 2013 is cut off because of the suspension of IPOs under China
Securities Regulatory Commission. According to the last controlling shareholder, our sample is divided into state- and family-controlled firms. This table reports the number and the percentage of
politically connected firms.
Table 3
Summary statistics of variables.
N Mean Median STD Min Max
Panel A: The full sample

LARGEST 1086 0.413 0.405 0.150 0.109 0.812
LEV 1086 0.515 0.532 0.156 0.057 0.977
TA 1086 20.283 20.076 1.050 18.443 23.627
MKT_BK 1086 9.583 7.725 6.635 1.756 60.656
REGT 1086 0.133 0.000 0.339 0.000 1.000
Panel B: State-controlled firms
LARGEST 374 0.473 0.488 0.152 0.147 0.705
LEV 374 0.552 0.577 0.143 0.179 0.977
TA 374 20.628 20.261 1.320 18.708 23.428
MKT_BK 374 7.634 5.876 5.743 2.162 32.913
REGT 374 0.251 0.000 0.434 0.000 1.000
Panel C: Family-controlled firms
LARGEST 712 0.382 0.376 0.140 0.109 0.812
LEV 712 0.495 0.509 0.159 0.057 0.943
TA 712 20.102 19.983 0.820 18.443 23.627
MKT_BK 712 10.607 9.170 6.842 1.756 60.656
REGT 712 0.070 0.000 0.256 0.000 1.000
Fig. 1. depicts the mean post-IPO cumulative abnormal returns adjusted by equally-weighted market returns from one to 36 months after the initial
trading month of 1086 firms in China that went public during 2001–2015, sorted by whether their chairpersons are politically connected.
trading month of 374 state-controlled firms in China that went public during 2001–2015, sorted by whether their chairpersons are politi
cally connected.
8
trading month of 712 family-controlled firms in China that went public during 2001–2015, sorted by whether their chairpersons are politi
cally connected.
dependent variables. For the full sample, the regression coefficients of political connections on CAR_MNTH12, CAR_MNTH24, and
CAR_MNTH36 are significantly positive and gradually increase from 0.085 to 0.112. This result shows that political connections can
significantly enhance firm value. We separate our sample into state- and family-controlled subsamples. The political connections of
state-controlled firms do not significantly affect the value of firms listed on the stock exchanges from 2001 to 2015. This result is
somewhat surprising, given the previous findings of Fan et al. (2007). One possible interpretation of the nonsignificant relation be
tween political connections and aftermarket returns is both the grabbing and helping hands of the government. This could be because
the pros of political connections can offset their cons. Government ownership can be a complement for political connections in
influencing corporate behaviors (Wu et al., 2009).
In family-controlled firms, political connections have significantly positive effects on corporate value. The coefficients of
CAR_MNTH12, CAR_MNTH24, and CAR_MNTH36 are all significant at the 5 % level, and the coefficients of political connections range
from 0.101 to 0.146. This result indicates that, among family-controlled firms, those that are politically connected tend to perform
better than those without connections, and their positive effects on corporate performance increase with the periods after IPO. This
result is consistent with the literature (Chen et al., 2011a; Faccio, 2006).
To determine how private property rights interact with political connections, we also regress political connection dummy, a
property right dummy, and their interaction on the three-year CAR_MNTH. Table 5 reports the results, where the interaction variable
POL*PRIV is our major concern, where PRIV is the private firm dummy variable. We find that political connections can help private
firms increase firm value.
The evidence in Table 4 shows that political connections significantly enhance the value of family-controlled firms, but cannot
significantly affect that of state-controlled firms.
4.3. Robustness tests
The above relation between political connections and post-IPO long term performance may be biased due to alternative stock-based
measures of performance, alternative political connection proxies, and potential endogeneity issues.
4.3.1. Relative stock-based performance

We re-examine the effects of political connection on post-IPO performance with CAR_MNTHs adjusted by value-weighted market
returns, buy-and-hold abnormal returns adjusted by equally-weighted market returns, and CAR_MNTH adjusted by the industry
median value. The regressions using alternative stock-based indicators further confirm the results in Table 4.
4.3.2. Types of political connections
4.3.2.1. Politically connected chairpersons and CEOs. Besides determining political connections by the political relationships of the
chairpersons who do not also hold the CEO post, we use the political connections of CEOs who do not also hold the chairman post,
CEO–chairperson duality, chairpersons who also hold the CEO post, and chairperson and CEOs as alternative indicators to re-
investigate the relation between political connection and long-run performance. The results show that the political connections of
just the CEO generally increase the corporate value of family-controlled firms during subsequent years, but do not influence state-
controlled firms. Such results differ sharply from those of Fan et al. (2007). The regression results of using the political connections
of chairpersons and CEOs together are consistent with those in Table 4. In addition, we regress the political connections of chairpersons
who are not also the CEO, who are also the CEO, and CEOs who are not also the chair on post-IPO long-term performance to examine
the influences of the three types. The results show that only the political connections of chairpersons who are not also the CEO can
9
Table 4
Political connections and post-IPO long term performance.
The full sample State-controlled firms Family-controlled firms
CAR CAR CAR CAR CAR CAR CAR CAR CAR

_MNTH12 _MNTH24 _MNTH36 _MNTH12 _MNTH24 _MNTH36 _MNTH12 _MNTH24 _MNTH36
Panel A: Mean and median statistics

Mean Total 0.024 0.037 0.046 − 0.064 − 0.075 − 0.087 0.070 0.095 0.116
Political 0.063 0.059 0.060 − 0.010 − 0.041 − 0.058 0.113 0.129 0.142
connection
Non- 0.007 0.027 0.040 − 0.094 − 0.093 − 0.103 0.055 0.082 0.106
connection
Difference in 0.055* 0.033* 0.020* 0.084* 0.053 0.045 0.058* 0.047** 0.036**
mean
Median Total − 0.087 − 0.078 − 0.070 − 0.086 − 0.099 − 0.174 − 0.087 − 0.058 − 0.015
Political − 0.065 − 0.059 − 0.067 − 0.077 − 0.085 − 0.185 − 0.042 − 0.004 0.001
connection
Non- − 0.102 − 0.085 − 0.071 − 0.107 − 0.107 − 0.157 − 0.098 − 0.074 − 0.032
connection
Difference in 0.036* 0.025 0.004 0.030 0.022 − 0.028 0.056* 0.070 0.033*
median
Panel B: Regression results of the effects of political connections on post-IPO long term performance
POL 0.085** 0.089** 0.112** 0.035 0.004 0.016 0.101** 0.116** 0.146**
(2.49) (2.28) (2.47) (1.06) (0.09) (0.28) (1.98) (2.06) (2.32)
LARGEST − 0.181** − 0.174 − 0.039 0.047 0.113 0.229 − 0.283** − 0.280* − 0.164
(− 1.99) (− 1.63) (− 0.30) (0.41) (0.81) (1.11) (− 2.06) (− 1.82) (− 0.93)
LEV − 0.188* − 0.045 − 0.132 − 0.039 − 0.050 − 0.031 − 0.104 0.158 0.101
(− 1.70) (− 0.33) (− 0.82) (− 0.28) (− 0.26) (− 0.12) (− 0.60) (0.75) (0.44)
TA 0.024 − 0.016 − 0.087*** 0.051*** 0.033 − 0.016 − 0.010 − 0.076* − 0.181***
(1.48) (− 0.74) (− 3.39) (2.73) (1.20) (− 0.45) (− 0.31) (− 1.90) (− 4.21)
MKT_BK 0.020*** 0.017*** 0.010** 0.019*** 0.015*** 0.011 0.021*** 0.018*** 0.009
(5.96) (4.41) (2.18) (4.59) (2.67) (1.53) (4.76) (3.67) (1.62)
REGT 0.095* 0.131* 0.176* 0.137* 0.200* 0.292** − 0.028 − 0.057 − 0.089
(1.76) (1.81) (1.88) (1.84) (1.93) (2.12) (− 0.39) (− 0.61) (− 0.76)
CONS − 0.472 0.262 1.910*** − 1.350*** − 0.205 0.507 − 0.501 1.842** 4.282***
(− 0.87) (0.46) (3.06) (− 3.47) (− 0.39) (0.72) (− 0.76) (2.36) (4.64)
N 1086 1086 1086 374 374 374 712 712 712
2
Adj. R 0.535 0.445 0.383 0.539 0.449 0.323 0.553 0.468 0.424
Panel A presents the mean and median statistics of stock performance measures of IPO firms during 2001− 2015. According to the last controlling
shareholders, our sample is divided into state- and family-controlled firms. We also decompose full sample of firms, state-controlled firms, and family-
controlled firms into two subsamples (i.e., political connection and non-connection), based on whether their chairpersons are politically connected,
respectively. Panel B reports the regression results of effects of political connections on the post-IPO stock performance. The dependent variables
reported in this table are the 12, 24, and 36 months cumulative abnormal returns (CAR_MNTHs). Monthly returns are used to calculate the
CAR_MNTHs. The independent variables are the political connection dummy POL, financial leverage ratio LEV, the percentage of the largest
shareholding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and the dummy variable REGT. Dummy variables
as proxies for industry and year effects are included in ordinary least squares regressions but not reported. Robust t-statistics are provided in pa
rentheses. ***, **, * denote significant at the 1 %, 5 %, and 10 % levels, respectively.
significantly enhance corporate value during the years subsequent to IPOs, whereas the political connections of CEOs who are also the
chair and CEOs who are not cannot affect corporate value.
4.3.2.2. Types of political connected chairpersons. We categorize with dummy variables the political connections of chairpersons who
are not also the CEO into former government officials, incumbent government officials, and current or former members of the PPCC or
PC, to regress the effects of political connections on post-IPO long term returns. We find that current or former members of the PPCC or
PC have a significant and positive impact on long-term returns in family-controlled firms. As opposed to private listed firms, the
dummies for political connections do not affect the value of state-controlled firms.
4.3.2.3. Types of political connected board. We also decompose the political connections of politically connected boards into of the
connections of (i) chairpersons who are not also the CEO, (ii) chairperson–CEOs, (iii) vice chairpersons, (iv) directors other than
chairpersons, vice chairpersons, and independent directors, and (v) independent directors. The regression results for the political
connections of chairpersons who are not also the CEO remain qualitatively the same.
4.3.3. Potential endogeneity issues

We are concerned about potential endogeneity issues in the relationship between political connections and long-term performance.
Following Fan et al. (2007), we adopt the two-stage least square method, where the instrument variables are the per capita gross
domestic product, the unemployment rate, and the budget deficit, to control for the endogeneity of political connections. The results
show that potential endogeneity issues between political connections and long-term performance essentially do not influence our main
10
Table 5
Regression results of the effects of property rights on the relationship between political connections and post-IPO long term performance.
CAR_MNTH36 CAR_MNTH36 CAR_MNTH36 CAR_MNTH36 CAR_MNTH36 CAR_MNTH36
POL 0.070 0.066

(1.46) (1.55)
PRIV 0.041 0.062 0.285*** − 0.003
(0.74) (1.22) (2.87) (− 0.04)
POL_PRIV 0.237*** 0.178** 0.227*** 0.135*
(3.00) (2.01) (2.84) (1.67)
LARGEST − 0.057 − 0.058 − 0.042 − 0.047 − 0.282 0.095
(− 0.42) (− 0.42) (− 0.30) (− 0.37) (− 1.19) (0.55)
LEV − 0.127 − 0.122 − 0.134 − 0.092 − 0.296 − 0.006
(− 0.80) (− 0.76) (− 0.83) (− 0.64) (− 1.01) (− 0.03)
TA − 0.078*** − 0.083*** − 0.074*** − 0.070*** − 0.008 − 0.124***
(− 3.12) (− 3.28) (− 2.90) (− 3.03) (− 0.20) (− 3.71)
MKT_BK 0.010** 0.010*** 0.010** 0.007** 0.010 0.009**
(2.54) (2.58) (2.46) (2.00) (1.26) (2.02)
REGT 0.164 0.168 0.165 0.175* 0.145 0.269**
(1.51) (1.54) (1.52) (1.78) (0.77) (2.04)
CONS 1.954** 2.029** 1.853** 2.714*** − 0.454 2.649***
(2.32) (2.41) (2.17) (3.53) (− 0.44) (2.80)
N 1086 1086 1086 1086 327 759
Adj. R2 0.445 0.446 0.445 0.402 0.511 0.454
F 16.019 15.802 15.750 13.144 7.955 11.861
The dependent variable reported in this table is the 36 months cumulative abnormal return CAR_MNTH36. The independent variables are the political
connection dummy POL, the private right dummy PRIV, the interaction term of political connection and private dummy POL_PRIV, financial leverage
ratio LEV, the percentage ownership of largest shareholder LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and
the dummy variable REGT. Year and industry dummy variables are included in ordinary least squares regressions but not reported. Robust t-statistics
are provided in parentheses. ***, **, * denote significant at the 1 %, 5 %, and 10 % levels, respectively.
conclusions. The results also hold when endogeneity issues are considered.
5. Short-term stock returns1
This section investigates how the stock market captures the effects of political connected chairpersons. First, we examine the effects
of political connections on daily stock returns for the first 60 days of trading, starting from the second day after the listing day. We then
focus on IPO first-day returns.
5.1. Short-term returns
Figs. 4–6 demonstrate the post-IPO daily cumulative abnormal returns adjusted by equally-weighted market returns (CAR_DAY)
from one to 60 days. Our sample is decomposed into firms with politically-connected chairpersons and those without connections.
Fig. 4 depicts the mean post-IPO cumulative abnormal returns of 1086 firms for one to 60 days. The variable CAR_DAY decreases by
2.04 % for the full sample of firms, by 0.9 % for political connected firms, and by 2.49 % for nonconnected firms. Fig. 5 depicts − 5.13 %
drop in the short-term returns of state-controlled firms. The variable CAR_DAY for politically connected firms decreases by 1.90 %,
while that for nonconnected firms deceases by 6.93 %. Fig. 6 shows that the 60-day returns of family-controlled firms increase by 0.4
%. The returns of nonconnected firms also decrease by 0.44 %, in contrast with a decrease of 0.37 %. These figures evidently show that
the mean short-term returns of politically connected firms are better than those of nonconnected ones. Such results are mainly driven
by state-controlled firms, and they differ from the results for long-term returns. Political connections could have time-variant effects on
IPO returns in subsequent evolution.
Table 6 presents the regression results for the effects of political connections on the short-term returns. In the full sample of firms,
political connections are significantly and positively related with 20-, 40- and 60-day returns. Compared with the nonsignificant results
for political connections on short-term returns in family-controlled firms, the political connections of state-controlled firms show a
significant and positive effect on IPO short-term returns. In sum, the results in Table 6 are consistent with Figs. 4–6.
5.2. IPO underpricing
Table 7 reports the relation between politically connected chairpersons and IPO first-day returns. The IPO underpricing that proxies
for IPO first-day returns consists of the raw first-day returns and market-adjusted first-day returns. We find political connections to
have a significant and positive effect of political connection on IPO first-day returns in the full sample. Our sample firms are
1
Thanks for the valuable suggestions from the referee.
11
Fig. 4. plots the mean post-IPO cumulative abnormal returns adjusted by equally weighted market returns from one to 60 days after the initial
trading day of 1086 firms in China that went public during 2001–2015, sorted by whether their chairpersons are politically connected.
Fig. 5. plots the mean post-IPO cumulative abnormal returns adjusted by equally weighted market returns from one to 6 days after the initial
trading day of 374 state-controlled firms in China that went public during 2001–2015, sorted by whether their chairpersons are politi
cally connected.
Fig. 6. plots the mean post-IPO cumulative abnormal returns adjusted by equally weighted market returns from day to 60 days after the initial
trading day of 712 family-controlled firms in China that went public during 2001-2015, sorted by whether their chairpersons are politi
cally connected.
12
Table 6
Political connections and IPO initial returns.
CAR _DAY20 CAR _DAY40 CAR _DAY60 CAR _DAY20 CAR _DAY40 CAR _DAY60 CAR _DAY20 CAR _DAY40 CAR _DAY60
POL 0.021* 0.025** 0.026* 0.034** 0.046** 0.041* 0.017 0.017 0.020
(1.76) (2.00) (1.86) (2.32) (2.52) (1.95) (1.00) (0.98) (1.09)
LARGEST − 0.036 − 0.057 − 0.058 0.038 0.035 0.045 − 0.102** − 0.128** − 0.132**
(− 1.10) (− 1.52) (− 1.37) (0.88) (0.70) (0.73) (− 2.09) (− 2.39) (− 2.25)
LEV − 0.031 − 0.019 − 0.030 − 0.059 − 0.038 − 0.048 0.041 0.057 0.036
(− 0.76) (− 0.41) (− 0.58) (− 1.20) (− 0.59) (− 0.62) (0.66) (0.87) (0.49)
TA 0.016*** 0.020** 0.020** 0.013* 0.023** 0.029** 0.002 0.003 0.003
(2.79) (2.45) (2.10) (1.77) (2.07) (2.15) (0.25) (0.25) (0.26)
MKT_BK 0.006*** 0.009*** 0.010*** 0.007*** 0.010*** 0.013*** 0.007*** 0.009*** 0.010***
(4.70) (5.77) (6.60) (4.13) (5.87) (5.45) (3.82) (4.35) (5.09)
REGT − 0.006 0.006 − 0.000 − 0.017 − 0.021 − 0.026 − 0.019 0.009 0.004
(− 0.47) (0.34) (− 0.00) (− 0.99) (− 0.86) (− 0.92) (− 0.89) (0.34) (0.14)
CONS − 0.173 − 0.382** − 0.390** 0.798** 0.486 0.326 − 0.197 − 0.266 − 0.356
(− 1.43) (− 2.37) (− 2.08) (2.53) (1.32) (0.78) (− 1.03) (− 1.23) (− 1.43)
N 1086 1086 1086 374 374 374 712 712 712
Adj. R2 0.599 0.515 0.526 0.447 0.353 0.345 0.625 0.558 0.580
F 14.198 15.399 22.061 0.034** 0.046** 0.041* 11.957 13.384 18.112
This table presents the regression results of effects of political connection on the post-IPO stock performance in the full sample, state-controlled firms,
and family-controlled firms, respectively. The dependent variables are raw post-IPO 20, 40, 60 days cumulative abnormal returns (CAR_DAY20,
CAR_DAY40, and CAR_DAY60). CAR_DAYs are adjusted by equally weighted market return from the second days after the IPO month. Daily returns
are used to calculate the CAR_DAYs. The independent variables are the political connection dummy POL, financial leverage ratio LEV, the percentage
of the largest shareholding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and the dummy variable REGT. Year
dummy variable is included in ordinary least squares regressions but not reported. Robust t-statistics are provided in parentheses. ***, **, * denote
significant at the 1 %, 5 %, and 10 % levels, respectively.
Table 7
Political connections and IPO underpricing.
IR Adj.IR IR Adj.IR IR Adj.IR
POL 0.078* 0.084** 0.120 0.140* 0.053 0.051

(1.81) (1.97) (1.53) (1.78) (1.04) (1.02)
LARGEST 0.056 0.064 − 0.312 − 0.237 0.144 0.114
(0.44) (0.51) (− 1.24) (− 0.96) (1.00) (0.78)
LEV 0.261** 0.283** 0.119 0.091 0.235 0.289*
(1.98) (2.13) (0.45) (0.35) (1.42) (1.70)
TA − 0.193*** − 0.194*** − 0.241*** − 0.241*** − 0.245*** − 0.182***
(− 8.77) (− 8.85) (− 7.27) (− 7.35) (− 5.32) (− 5.44)
MKT_BK 0.010** 0.010** 0.013 0.013 0.011*** 0.011**
(2.53) (2.48) (1.35) (1.41) (2.60) (2.56)
REGT 0.082 0.086 0.093 0.085 0.099 0.115
(1.41) (1.50) (1.12) (1.03) (1.17) (1.40)
CONS 4.101*** 4.072*** 5.125*** 5.080*** 4.364*** 4.436***
(9.73) (9.70) (7.19) (6.92) (6.80) (6.96)
N 1086 1086 374 374 712 712
Adj. R2 0.494 0.484 0.368 0.365 0.542 0.523
F 39.305 40.185 10.745 11.304 25.015 22.626
This table presents the regression results of effects of political connections on IPO underpricing. The dependent variables are raw IPO first-day returns
IR, and market-adjusted IPO first-day returns Adj.IR. The independent variables are the political connection dummy POL, financial leverage ratio LEV,
the percentage of the largest shareholding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and the dummy
variable REGT. Year dummy variable is included in ordinary least squares regressions but not reported. Robust t-statistics are provided in parentheses.
***, **, * denote significant at the 1 %, 5 %, and 10 % levels, respectively.
decomposed into state- and family-controlled firms, based on the ultimate controlling shareholders. We find a significantly positive
relation between political connections and IPO underpricing in state-controlled firms, and a moderately positive effect of political
connections in family-controlled firms.
6. Three mechanisms of political connections
This section investigates the policy burden, investor protection, and government patronage effects of political connections on long-
term performance in state- and family-controlled firms.
13
W. Zhang et al.
Table 8
Regression results of the effects of political connections on policy burdens.
EMP11 EMP12 EMP21 EMP22 EXEMP11 EXEMP12 EXEMP21 EXEMP22 COST_TA COST_SALE
Panel A: State-controlled firms

POL 0.001 0.001* 0.011*** 0.013*** 0.002** 0.003** 0.011** 0.010* − 0.002 0.077
(1.37) (1.68) (3.39) (3.20) (2.07) (2.58) (2.14) (1.73) (− 0.92) (1.19)
LARGEST 0.014*** 0.013*** 0.028*** 0.019 0.015*** 0.017*** 0.002 − 0.036* 0.050*** 0.199
(5.75) (4.87) (2.68) (1.44) (4.59) (4.65) (0.11) (− 1.91) (7.20) (0.79)
LEV 0.006** 0.010*** 0.018* 0.025* − 0.004 − 0.001 − 0.044*** − 0.051** 0.007 0.261
(2.34) (3.54) (1.68) (1.78) (− 1.57) (− 0.29) (− 2.64) (− 2.55) (1.03) (1.27)
TA − 0.003*** − 0.003*** − 0.003*** − 0.003** − 0.000 0.000 − 0.013*** − 0.008*** − 0.006*** 0.026
(− 9.11) (− 8.28) (− 2.73) (− 2.00) (− 0.50) (0.28) (− 5.09) (− 2.74) (− 6.59) (0.98)
MKT_BK − 0.000*** − 0.000*** − 0.000 − 0.000 − 0.000 0.000 − 0.001 0.001 − 0.000 − 0.006
(− 4.10) (− 3.52) (− 0.52) (− 1.34) (− 0.31) (0.83) (− 1.10) (0.81) (− 0.88) (− 1.38)
REGT − 0.000 − 0.000 − 0.006 − 0.008* − 0.002 − 0.002 0.002 0.002 0.006** − 0.099
(− 0.23) (− 0.13) (− 1.49) (− 1.66) (− 1.52) (− 1.46) (0.27) (0.26) (2.36) (− 1.39)
CONS 0.062*** 0.059*** 0.082*** 0.082** 0.005 − 0.009 0.335*** 0.302*** 0.163*** − 0.462
(10.14) (8.92) (3.18) (2.48) (0.67) (− 1.07) (5.05) (3.51) (4.19) (− 0.81)
N 1108 987 1100 980 464 395 336 285 1112 1105
2
Adj. R 0.092 0.087 0.019 0.016 0.075 0.085 0.156 0.961 0.134 0.008
F 19.750 16.568 4.560 3.600 . . 3.953 320.742 8.817 .
Panel B: Family-controlled firms
14
POL 0.000 0.000 0.002 0.002 0.001 0.001 0.025 − 0.001 − 0.005** − 0.008***
(1.09) (0.89) (0.97) (0.78) (1.28) (1.13) (1.25) (− 0.05) (− 2.51) (− 2.69)
LARGEST 0.002 0.003* 0.002 0.002 − 0.002 0.001 0.018 − 0.017 − 0.013** − 0.015
(1.44) (1.84) (0.33) (0.23) (− 0.64) (0.34) (0.33) (− 0.25) (− 2.11) (− 1.50)
LEV 0.015*** 0.018*** − 0.008 − 0.008 0.003 0.005* − 0.129** − 0.109* − 0.020*** − 0.081***
(9.54) (9.75) (− 1.12) (− 0.95) (1.36) (1.66) (− 2.24) (− 1.68) (− 2.80) (− 6.93)
TA − 0.003*** − 0.004*** − 0.001 − 0.001 − 0.001 − 0.001** 0.084** 0.068* − 0.001 − 0.009***

(− 10.66) (− 10.46) (− 1.07) (− 0.61) (− 1.16) (− 2.05) (2.28) (1.81) (− 0.83) (− 3.95)
MKT_BK − 0.000*** − 0.000*** − 0.000 − 0.000 0.000 − 0.000 0.002** 0.002** 0.000** 0.000
(− 3.50) (− 4.37) (− 1.10) (− 1.22) (0.56) (− 0.03) (2.55) (2.09) (2.57) (0.23)
REGT − 0.006*** − 0.006*** − 0.013*** − 0.015*** − 0.004*** − 0.004*** − 0.029 − 0.048 − 0.007** − 0.025***
(− 6.51) (− 6.25) (− 3.65) (− 3.55) (− 6.02) (− 5.84) (− 0.84) (− 1.38) (− 2.11) (− 4.72)
CONS 0.074*** 0.081*** 0.063** 0.056* 0.013 0.023** − 1.448* − 1.322* 0.067** 0.294***
(12.07) (11.69) (2.45) (1.79) (1.47) (2.27) (− 1.87) (− 1.75) (2.29) (6.08)
N 2067 1657 2060 1651 837 667 724 529 2067 2058
Adj. R2 0.081 0.098 0.009 0.008 0.094 0.113 0.038 0.007 0.046 0.176
F 31.483 31.150 3.963 3.304 7.195 6.066 . . 5.502 21.000
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
The dependent variables reported in this table are the labor employments (EMP11, EMP12, EMP21, EMP22), the excess labor employments (EXEMP11, EXEMP12, EXEMP21, EXEMP22), and labor costs
(COST_TA, COST_SALE). The independent variables are the political connection dummy POL, financial leverage ratio LEV, the percentage of the largest shareholding LARGEST, the natural log of total
assets TA, the market to book equity ratio MKT_BK, and the dummy variable REGT. Year dummy variables are included in ordinary least squares regressions but not reported. Robust t-statistics are
reported in parentheses. ***, **, * denote significant at the 1 %, 5 %, and 10 % levels, respectively.
W. Zhang et al.
Table 9
Political connections and CAR_MNTH36 in different institutional settings.
INST = PORT INST = LEASE INST = PORT_LEASE
CAR_MNTH36 CAR_MNTH36 CAR_MNTH36 CAR_MNTH36 CA_MNTH36 CAR_MNTH36 CAR_MNTH36 CAR_MNTH36 CAR _MNTH36
Pane A: State-controlled firms

POL 0.188* 0.111 0.132
(1.82) (1.51) (1.38)
INST 0.045 0.115 0.051 0.094 0.085 0.146
(0.52) (0.98) (0.51) (0.78) (1.07) (1.32)
POL*INST − 0.107 − 0.132 − 0.319 − 0.123 − 0.159 − 0.269 − 0.012 − 0.053 − 0.192
(− 1.36) (− 1.22) (− 1.55) (− 1.03) (− 0.98) (− 1.18) (− 0.14) (− 0.54) (− 0.97)
LARGEST 0.244 0.240 0.222 0.232 0.230 0.213 0.238 0.233 0.171
(1.71) (1.78) (1.68) (1.68) (1.76) (1.67) (1.70) (1.71) (1.44)
LEV − 0.020 − 0.014 − 0.007 − 0.029 − 0.033 − 0.047 − 0.038 − 0.062 − 0.033
(− 0.07) (− 0.05) (− 0.03) (− 0.10) (− 0.12) (− 0.18) (− 0.14) (− 0.25) (− 0.14)
TA − 0.006 − 0.005 − 0.006 − 0.011 − 0.007 − 0.010 − 0.012 − 0.002 − 0.010
(− 0.09) (− 0.08) (− 0.10) (− 0.16) (− 0.12) (− 0.16) (− 0.17) (− 0.04) (− 0.17)
MKT_BK 0.011 0.011 0.012* 0.012 0.012* 0.012* 0.012 0.012 0.011*
(1.77) (1.78) (2.05) (1.75) (1.83) (1.98) (1.72) (1.76) (1.90)
REGT 0.290* 0.286* 0.298* 0.292* 0.287* 0.294* 0.283* 0.278* 0.290*
(1.92) (1.89) (1.91) (1.93) (1.87) (1.88) (1.82) (1.84) (1.79)
CONS 3.333** 3.343** 3.273** 3.453** 3.372** 3.332** 3.341** 3.107** 3.227***
(2.85) (2.83) (2.86) (2.89) (3.01) (3.01) (2.83) (2.92) (3.14)
N 374 374 374 374 374 374 374 374 374
Adj. R2 0.326 0.325 0.333 0.326 0.325 0.328 0.322 0.323 0.302
15
Panel B: Family-controlled firms

POL 0.127* 0.122* 0.111
(1.86) (2.01) (1.46)
INST − 0.064 − 0.044 − 0.156** − 0.139* − 0.278*** − 0.266***
(− 0.97) (− 0.62) (− 2.39) (− 2.15) (− 3.13) (− 3.22)
POL*INST 0.129** 0.172** 0.078 0.128** 0.247*** 0.159* 0.105** 0.236*** 0.153**
(2.42) (2.79) (0.97) (2.26) (3.11) (1.96) (2.78) (4.67) (2.37)

LARGEST − 0.168 − 0.183 − 0.182 − 0.162 − 0.186 − 0.191 − 0.161 − 0.249 − 0.252
(− 0.99) (− 1.10) (− 1.08) (− 0.97) (− 1.18) (− 1.17) (− 0.98) (− 1.53) (− 1.50)
LEV 0.056 0.055 0.077 0.049 0.062 0.086 0.055 0.110 0.124
(0.20) (0.20) (0.28) (0.18) (0.23) (0.32) (0.20) (0.42) (0.47)
TA − 0.168*** − 0.165*** − 0.171*** − 0.167*** − 0.163*** − 0.170*** − 0.167*** − 0.163*** − 0.168***
(− 3.06) (− 3.03) (− 3.11) (− 3.06) (− 3.04) (− 3.12) (− 3.04) (− 3.15) (− 3.21)
MKT_BK 0.010 0.010 0.010 0.010 0.010 0.010 0.010 0.009 0.009
(1.53) (1.51) (1.55) (1.57) (1.48) (1.49) (1.58) (1.52) (1.50)
REGT − 0.099 − 0.097 − 0.083 − 0.101 − 0.089 − 0.076 − 0.089 − 0.101 − 0.095
(− 1.12) (− 1.09) (− 0.98) (− 1.15) (− 1.00) (− 0.89) (− 0.94) (− 0.87) (− 0.86)
CONS 3.581*** 3.486*** 3.461*** 3.581*** 3.434*** 3.399*** 3.556*** 3.635*** 3.585***
(4.06) (4.05) (4.07) (4.07) (4.11) (4.11) (3.98) (4.20) (4.25)
N 712 712 712 712 712 712 712 712 712
Adj. R2 0.472 0.473 0.475 0.472 0.476 0.478 0.472 0.489 0.491
The dependent variable in this table is the 36 months cumulative abnormal return. The independent variables are the political connection dummy POL, the institutional dummy variable INST char
acterized by commercial ports PORT, leased territories LEASE, and opened cities PORT_LEASE, the interaction term between political connection dummy and the institutional dummy POL*INST, financial
leverage ratio LEV, the percentage of the largest shareholding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and the dummy variable REGT. Dummy variables as
proxies for industry and year effects are also included in the model but not supported. Cluster analysis is adopted to calculate t-statistics provided in parentheses. ***, **, * denote significant at the 1 %, 5
%, and 10 % levels, respectively.
6.1. Policy burden
Table 8 reports the regression results of the effects of political connections on policy burdens. We employ firm employment, excess
employment, and labor cost to proxy for the policy burdens imposed on listed firms. Panel A presents evidence of political connections
in state-controlled firms, which are positively and significantly associated with firm employment and excess employment. The co
efficients of political connections on labor costs adjusted by total assets and sales are nonsignificant. Panel A also suggests that political
connections increase firm excess employment, but do not affect labor costs significantly. The results in Panel B shows the regression
results for political connections in family-controlled firms. We find that political connections have a significant and negative effects on
labor costs, but are insignificantly related to firm employment and excess employment. Table 8 offers evidence that political con
nections in state-controlled firms can increase policy burdens, but there is no such positive relation in family-controlled firms.
Therefore, H1 is supported.
6.2. Investor protection
Given the absence of strong market-enhancing institutions, the weak enforcement of the law, fragile property rights, and a strong
government, family ownership can be subject to expropriation (La Porta et al., 2002). Bai et al. (2006) and Chen et al. (2011a) uncover
the substitutability of formal institutions by political connections. To demonstrate this result further, we investigate the interaction
effects of political connections with those of weak market institutions on the three-year CAR_MNTH. Table 9 presents the empirical
results. We adopt the dummy variables of commercial ports, leased territories, and open cities as proxies for strong institutional
settings (Acemoglu and Johnson, 2005; Fan et al., 2013). The specific definitions of these variables are provided in Table 1. Panels A
and B report the regression results in state- and family-controlled firms, respectively. Our major concerns are the interaction terms
between political connections and weak institutions. In Panel A, these interaction terms are all negative but nonsignificant, implying
Table 10
Political connections and government patronages.
TOTAL_LOAN LOAN_TERM TAX_DUM TAX_DUM TAX_DIFF ETR1 ETR2
Panel A: State-controlled firms

POL 0.011* 0.593* − 0.343** − 0.075** − 0.075** − 0.019** − 0.018
(2.08) (2.01) (− 2.38) (− 2.40) (− 2.35) (− 2.31) (− 1.49)
LARGEST 0.004 0.269 − 1.421*** − 0.310*** − 0.309*** 0.052* 0.020
(0.22) (0.66) (− 3.03) (− 3.07) (− 3.00) (1.96) (0.51)
LEV 0.038** − 1.176 − 0.987* − 0.215* − 0.198 − 0.085*** − 0.087*
(2.79) (− 1.11) (− 1.70) (− 1.72) (− 1.60) (− 2.91) (− 1.96)
TA − 0.005** 0.206* − 0.145** − 0.032** − 0.031* − 0.005 − 0.015**
(− 2.22) (2.01) (− 2.03) (− 2.05) (− 1.94) (− 1.05) (− 2.50)
MKT_BK 0.000 − 0.026** 0.012 0.003 0.002 0.001 0.001
(0.90) (− 2.72) (0.80) (0.80) (0.80) (1.58) (0.69)
REGT 0.017 1.128 0.010 0.002 0.000 − 0.005 − 0.007
(1.64) (1.27) (0.03) (0.03) (0.00) (− 0.22) (− 0.27)
CONS 0.068 − 2.174 4.883** 0.849** 0.405*** 0.531
(1.51) (− 0.87) (2.33) (2.52) (4.76) (1.62)
N 1113 1006 1065 1065 1082 1113 1113
Pseudo R2/Adj. R2 0.039 0.014 0.0998 0.105 0.142 0.0785
Panel B:Family-controlled firms
POL 0.005*** 0.178 − 0.374*** − 0.060*** − 0.061*** − 0.001 − 0.020**
(3.15) (0.96) (− 2.85) (− 2.86) (− 2.73) (− 0.22) (− 2.53)
LARGEST − 0.001 0.171 0.941** 0.150** 0.124* 0.048*** 0.017
(− 0.05) (0.51) (2.19) (2.19) (1.93) (3.11) (0.57)
LEV 0.041** 0.245 − 3.187*** − 0.507*** − 0.431*** − 0.013 − 0.028
(2.39) (0.50) (− 5.47) (− 5.59) (− 5.14) (− 0.68) (− 0.73)
TA − 0.005 0.095 − 0.199** − 0.032** − 0.046*** − 0.008* 0.009
(− 1.70) (1.01) (− 1.99) (− 1.99) (− 2.74) (− 1.66) (0.75)
MKT_BK 0.000 0.005 0.017 0.003 0.003 0.000 0.001
(1.55) (0.58) (1.44) (1.44) (1.59) (0.94) (0.59)
REGT 0.014** − 0.480 0.054 0.009 0.003 − 0.020 − 0.031
(2.81) (− 1.22) (0.18) (0.18) (0.05) (− 1.36) (− 1.57)
CONS 0.094* − 1.605 6.056*** 2.226*** 0.254*** − 0.018
(1.79) (− 0.81) (2.78) (6.95) (2.70) (− 0.08)
N 2071 1726 1958 1958 2025 2033 1884
Pseudo R2/Adj. R2 0.010 0.005 0.189 0.207 0.0929 0.0318
The dependent variables in this table are the total bank loans TOTAL_LOAN, the loan term LOAN_TERM, and effective tax rates TAX_DUM, TAX_DIFF,
ETR1-ETR2. The independent variables are the political connection dummy POL, financial leverage ratio LEV, the percentage of the largest share
holding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and the dummy variable REGT. Dummy variables that
proxy for industry and year effects are also included in the model but not reported. Column (3) reports the results of logit regression, and Column (4)
reports the logit marginal effects on the tax dummy variable. The other columns use the ordinary least square method. Robust t- and z-statistics are
provided in parentheses. ***, **, * denote significant at the 1 %, 5 %, and 10 % levels, respectively.
16
W. Zhang et al.
Table 11
Political connections and pre-IPO accounting performance.
ROA_PREIPO ROE_PREIPO ROS_PREIPO ROA_PREIPO ROE_PREIPO ROS_PREIPO ROA_PREIPO ROE_PREIPO ROS_PREIPO

Mean Total 0.087 0.165 0.063 0.053 0.138 0.040 0.099 0.208 0.074
Political connection 0.075 0.175 0.055 0.043 0.118 0.036 0.087 0.197 0.063
Non-connection 0.091 0.195 0.070 0.060 0.149 0.042 0.107 0.217 0.083
Difference in mean − 0.016*** − 0.020*** − 0.014*** − 0.017** − 0.031*** − 0.007 − 0.019*** − 0.020*** − 0.020***
Median Total 0.077 0.152 0.048 0.045 0.126 0.025 0.090 0.195 0.058
Political connection 0.065 0.165 0.043 0.037 0.107 0.025 0.080 0.178 0.043
Non-connection 0.081 0.180 0.052 0.052 0.130 0.025 0.090 0.196 0.059
Difference in median − 0.016*** − 0.015*** − 0.008** − 0.016*** − 0.023*** 0.000 − 0.010*** − 0.018*** − 0.016***
Panel B: Regression results of the effects of political connections on pre-IPO accounting performance
POL − 0.007** − 0.019*** − 0.007* − 0.010** − 0.029*** − 0.001 − 0.007** − 0.018*** − 0.012***
(− 2.50) (− 3.30) (− 1.75) (− 2.18) (− 2.96) (− 0.07) (− 2.10) (− 2.60) (− 2.59)
LARGEST 0.023** 0.032 0.002 0.000 − 0.024 − 0.024 0.045*** 0.088*** 0.028
(2.45) (1.64) (0.13) (0.01) (− 0.63) (− 0.86) (3.79) (3.83) (1.58)
17
LEV − 0.220*** 0.011 − 0.294*** − 0.141*** − 0.165*** 0.055 − 0.336*** − 0.008 − 0.259***
(− 16.54) (0.45) (− 13.74) (− 6.38) (1.15) (− 8.40) (− 16.34) (− 1.38) (− 12.24)
TA − 0.002 0.000 0.006* − 0.003 0.000 0.010* 0.004 0.011* 0.006
(− 0.98) (0.10) (1.73) (− 1.13) (0.05) (1.84) (1.35) (1.75) (1.43)
MKT_BK 0.003*** 0.007*** 0.003*** 0.004*** 0.008*** 0.003*** 0.003*** 0.006*** 0.003***
(9.41) (9.97) (5.83) (4.70) (6.43) (3.60) (7.44) (7.71) (4.88)
REGT − 0.010 − 0.037*** − 0.019* − 0.012** − 0.000 − 0.008 − 0.036** − 0.049*** − 0.016**

(− 1.64) (− 2.75) (− 1.67) (− 0.03) (− 0.36) (− 1.98) (− 2.14) (− 3.30) (0.25)
CONS 0.137*** 0.079 − 0.018 0.142** − 0.013 0.053 0.091* − 0.043 0.017
(3.43) (0.90) (− 0.20) (2.52) (− 0.11) (0.57) (1.67) (− 0.33) (0.15)
N 1014 1014 1014 309 309 309 705 705 705
2
Adj. R 0.576 0.273 0.386 0.440 0.257 0.335 0.573 0.206 0.384
Panel A presents the mean and median values of pre-IPO accounting performance measures of Chinese firms that went public during 2001− 2015. According to the last controlling shareholders, our sample
is divided into state- and family-controlled firms. We also decompose the full sample, state-controlled firms, and family-controlled firms into two subsamples (i.e., political connection and non-
connection), based on whether their chairpersons are politically connected, respectively. Panel B reports the regression results of effects of political connections on pre-IPO accounting performance
measures. The dependent variables are the change in return on assets ROA_PREIPO, the change in return on equity ROE_PREIPO, and the change in return on sales ROS_PREIPO. The independent variables
are the political connection dummy POL, financial leverage ratio LEV, the percentage of the largest shareholding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and
the dummy variable REGT. Year and industry dummy variables are included in ordinary least squares regressions but not reported. Robust t-statistics are provided in parentheses. ***, **, * denote
that political connection are not a substitute among state-controlled firms in a weak institutional environment. The reason could be
substitution effect between government ownership and political connections. Panel B shows that the interaction terms between po
litical connection and institutions are positive and significant. This implies that political connections help protect private property
rights from government intervention, and improve the value of family-controlled firms. Political connections can be considered an
informal substitute for formal institutions. The results are consistent with those of Allen et al. (2005); Bai et al. (2006), and Chen et al.
(2011a). Our results support H2.
We also adopt marketization, government intervention, and legal indexes to proxy the development level of the Chinese institu
tional environment (Chen et al., 2011a; Fan et al., 2013). We also use government intervention based on definition of World Bank
(2006), and the preferential policy index of Démurger et al. (2002) as proxies for poor Chinese institutions, and retest the results in
Table 9. Generally, political connections can be seen as an alternative mechanism to protect private firms for protecting private firms
from government infringement in poor institutional settings. Our results in Table 9 are qualitatively robust to these alternatives.
6.3. Government patronage
This subsection examines whether political connections increase the likelihood of bank loans and reduce effective tax rates for
state- and family-controlled firms. The dependent variables are total bank loans TOTAL_LOAN, loan terms LOAN_TERM, and effective
tax rates TAX_DUM, TAX_DIFF, ETR1-ETR2. The independent variables are the same as those in Table 4. The regression results are
reported in Table 10. The dummy variables representing industry and year effects are included but not tabulated. Column (3) reports
the results of logit regression, and Column (4) reports the logit marginal effects on the tax dummy variable. The other columns use the
ordinary least squares.
Columns (1) and (2) in Table 10 report the results of the regression of political connections on bank loans in state- and family-
controlled firms, respectively. Consistent with the results of Khwaja and Mian (2005) and Fan et al. (2008), we find that the politi
cal connections of state-controlled firms have a positive impact on total loans and loan maturity at the 10 % level, and for
family-controlled firms political connections are positively related to total loans, with a positive but nonsignificant effect on loan
maturity. These results suggest that political connections can help state- and family-controlled firms obtain preferentially financial
treatment. Columns (3) to (7) report the regression results of political connections on the effective tax rate. Political connection has a
significantly negative impact on the effective tax rate, qualitatively implying that political connections reduce the effective tax rate in
state- and family-controlled firms. These results confirm the findings of Faccio (2006) and Wu et al. (2012), and H3 is supported.
Overall, political connection helps firms in obtaining more bank loans, longer loan maturities, and lower effective tax rates. This
evidence supports the government patronage effect of political connections.
7. Politically connected chairpersons and firm economic performance
7.1. Effect of Political connections of the board chairpersons on pre-IPO accounting performance
The results in Table 4 could be influenced by the efficiency of IPO firms, especially in terms of pre-IPO performance. There is no
denying that the positive relation between political connections and post-IPO long term performance may be due to the high efficiency
of politically connected firms instead of the value enhancement of political connections. Premti and Smith (2020) analyze charac
teristics related to earnings management during the IPO process, and find that IPO firms tend to engage in pre-IPO earnings man
agement (Chen et al., 2021a). Thus, we examine the effects of political connections on pre-IPO accounting performance. Logically,
such an examination partly addresses plausible issues of whether political connections play an unimportant role in influencing pre-IPO
accounting performance. We capture three accounting-based measures to proxy for pre-IPO accounting performance: (i) the average
return on assets ROA_PREIPO, (ii) the average return on equity ROE_PREIPO, and (iii) the average return on sales ROS_PREIPO, to proxy
for pre-IPO firm performance. The empirical results are reported in Table 11.
Panel A presents the mean and median values of the pre-IPO accounting measures for the subsamples distinguished by whether the
chairperson is politically connected or not. We find that when a chairperson is politically connected, their politically-connected firms
are highly likely to have lower average return on assets, an average return on equity, and an average return on sales compared to
nonconnected firms. Our between-group median tests follow a similar approach. Panel B reports results for the regression of the effects
of political connections on these pre-IPO accounting measures, after controlling for the independent variables such as those in Table 4.
Year and industry dummy variables are included in the ordinary least squares regressions but not reported. The results reveal that
political connection are significantly and negatively associated with pre-IPO accounting measures, implying that the value
enhancement of politically-connected firms might not trace back to their per se high efficiency.
7.2. Effect of political connections of the board chairpersons on accounting performance
This section performs the empirical analysis of the economic performance of political connections. Jiang et al. (2018) analyze the
firm profitability characteristics that are the most effective predictors of future stock returns in the Chinese stock market. We adopt
ROA, ROE, ROS, and EARNINGS to capture accounting-based performance. The specific definitions of these variables are given in
Table 1. The empirical analysis results are presented in Table 12.
Panel A of Table 12 reports the between-group mean and median values and their difference statistics. In the full sample of firms,
we find higher values of ROA, ROE, ROS, and EARNINGS in firms with politically connected chairpersons than other firms. These four
18
W. Zhang et al.
Table 12
Political connections and post-IPO accounting performance.
ROA ROE ROS EARNINGS ROA ROE ROS EARNINGS ROA ROE ROS EARNINGS

Mean Total − 0.066 − 0.169 − 0.048 − 0.450 0.049 0.157 − 0.021 − 1.090 − 0.078 − 0.193 − 0.060 − 0.172
Political connection − 0.056 − 0.153 − 0.038 1.194 0.064 0.204 − 0.011 − 0.586 − 0.066 − 0.175 − 0.048 1.874
Non-connection − 0.074 − 0.181 − 0.055 − 1.568 0.040 0.130 − 0.027 − 1.387 − 0.087 − 0.207 − 0.068 − 1.653
Difference in mean 0.017*** 0.028*** 0.017* 2.762*** 0.024 0.074 0.016 0.800 0.022*** 0.032*** 0.020* 3.527***
Median Total − 0.055 − 0.157 − 0.033 0.077 − 0.041 − 0.076 − 0.011 0.118 − 0.067 − 0.176 − 0.040 0.059
Political connection − 0.045 − 0.132 − 0.021 0.228 − 0.043 − 0.033 0.001 0.157 − 0.054 − 0.155 − 0.024 0.366
Non-connection − 0.062 − 0.168 − 0.037 − 0.036 − 0.036 − 0.089 − 0.012 0.060 − 0.073 − 0.187 − 0.045 − 0.054
Difference in median 0.017*** 0.036*** 0.017 0.264*** − 0.007 0.056 0.013 0.097 0.019*** 0.032*** 0.021 0.420***
Panel B: Regression results of the effects of political connections on post-IPO accounting performance
POL 0.010*** 0.029*** 0.016** 1.583 0.020 0.035 0.017 0.871 0.010** 0.026*** 0.019* 1.961*
(2.95) (4.21) (1.99) (1.62) (0.49) (0.34) (1.07) (0.46) (2.22) (3.13) (1.84) (1.67)
LARGEST − 0.000 0.014 0.001 − 2.821 0.219* 0.736** 0.085 2.885 − 0.024 − 0.069** − 0.029 − 3.554
(− 0.04) (0.54) (0.04) (− 0.88) (1.78) (2.35) (1.60) (0.46) (− 1.59) (− 2.27) (− 0.81) (− 0.91)
19
LEV 0.157*** 0.006 0.337*** 0.354 0.703*** 2.402*** 0.464*** − 0.866 0.191*** 0.026 0.261*** − 1.905
(10.46) (0.22) (9.18) (0.10) (5.85) (8.12) (7.81) (− 0.16) (10.70) (0.70) (6.32) (− 0.40)
TA 0.002 − 0.004 − 0.001 0.706** 0.008 0.073 − 0.021*** − 0.077 0.000 − 0.002 0.020*** 1.535***
(0.74) (− 0.94) (− 0.14) (2.02) (0.42) (1.61) (− 3.05) (− 0.14) (0.09) (− 0.24) (2.69) (2.99)
MKT_BK − 0.001*** − 0.003*** − 0.003*** 0.106 − 0.004 − 0.004 − 0.002 0.247* − 0.000 − 0.002*** − 0.003*** 0.047
(− 2.98) (− 5.52) (− 4.34) (1.47) (− 1.45) (− 0.51) (− 1.59) (1.96) (− 1.42) (− 2.94) (− 3.64) (0.53)
REGT 0.003 0.038** 0.067*** − 1.473 0.242*** 0.763*** 0.081*** 1.171 0.009 0.027 0.060* − 2.645

(0.36) (2.39) (4.10) (− 0.74) (2.81) (3.47) (3.07) (0.37) (1.02) (1.51) (1.87) (− 1.29)
CONS − 0.168*** − 0.003 − 0.347*** − 14.326** − 0.400 − 2.382*** 0.315** − 4.456 − 0.170*** − 0.051 − 0.710*** − 27.639***
(− 4.35) (− 0.03) (− 3.65) (− 2.33) (− 1.19) (− 2.77) (2.48) (− 0.49) (− 2.81) (− 0.38) (− 3.70) (− 2.84)
N 1086 1086 1010 1010 305 305 305 305 712 712 705 705
2
Adj. R 0.295 0.115 0.194 − 0.001 0.112 0.253 0.270 − 0.033 0.337 0.060 0.177 0.009
Panel A presents the mean and median values of accounting performance measures of Chinese firms that went in public during 2001− 2015. According to types of the last controlling shareholders, the
sample is divided into state- and family-controlled firms. We also decompose the full sample, state-controlled firms, and family-controlled firms into two subsamples (i.e., political connection and non-
connection), based on whether their chairpersons are politically connected, respectively. Panel B reports the regression results of political connection on accounting performance measures. The dependent
variables are the change in return on assets ROA, the change in return on equity ROE, the change in return on sales ROS, and the percentage of the average earnings EARNINGS. The independent variables
are the political connection dummy POL, financial leverage ratio LEV, the percentage of the largest shareholding LARGEST, the natural log of total assets TA, the market to book equity ratio MKT_BK, and
the dummy variable REGT. Year and industry dummy variables are included in ordinary least squares regressions but not reported. Robust t-statistics are provided in parentheses. ***, **, * denote
accounting-based measures perform better for family-controlled firms in the politically connected subsample than in the nonconnected
subsample. However, among state-controlled firms, there is no significant difference in the mean and median values between the two
subsamples, sorted by whether the chairpersons are politically connected or not. Following Fan et al. (2007), we also run a set of
regressions to examine how political connections influence the four accounting-based measures, after controlling for the same inde
pendent variables as in Table 4. The regression results provided in Panel B of Table 12 are qualitatively consistent with the results in
Panel A. When chairpersons have strong political affiliations, their firms tend to display better economic performance.
8. Discussion and conclusions
This study frames the effect of political connections on the post-IPO long-term performance of Chinese publicly traded firms with
different types of ownership. The evidence shows that political connections can improve the value of family-controlled firms, but
cannot significantly influence the value of state-controlled companies. We further propose the policy burdens, investor protection, and
government patronage effects of political connections, based on the grabbing, invisible, and helping hand, respectively. We find that
not only can political connections of state-controlled firms result in more policy burdens, but they also help obtain government
preferential treatments. In family-controlled firms in a weak institutional environment, political connections can substitute for the
protection of private property rights, as well as act as a channel for favorable treatments. Our study sheds light on rent seeking and
government intervention. We find a synthetic effect of the helping and grabbing hands in state-controlled firms, where the value
enhancement of political connections in family-controlled firms is attributed to the invisible and helping hands.
The results also show that political connections play an important role in the initial returns. Specifically, we provide the evidence
that political connections are significantly and positively associated with the initial returns of IPOs in state-controlled firms, but are
just moderately related to IPO short-term returns in family-controlled firms. Combined with post-IPO long-term performance, we
identify the time-variant effects of political connections on post-IPO returns in temporal evolution.
This study offers deep insight into the political connections of state- and family-controlled firms. In state-controlled firms, state
shareholders perform as government bureaucrats rather than real owners. The bewildering political revolving door between gov
ernment bureaucrats and senior executives incentives them to take on policy burdens, such as retirement pensions, other social-welfare
costs, and redundant workers, to pursue career objectives such as political power or future promotion in the bureaucratic system
instead of maximizing corporate value. Government ownership in state-controlled firms, where the governments remain the largest
shareholder, complements political connections in the protection of property rights. Political connections in state-controlled firm also
provide greater government patronage. The evidence shows that political connections lead to greater policy burdens and to more bank
loan and tax relief.
In transition economies such as China, there exists poor institutions, such as excessive government intervention and a weak legal
system. The establishment of the political connections of private firms guard against policy discriminations and imperfect institutions.
Political connections are regarded as an informal substitute for formal institutions in protecting private property rights. Moreover,
political connections allow family-controlled firms to enjoy more government preferential treatments. We show that political con
nections can enhance private firm value through bank loans, the real effective tax rate as well as investor protection. Building political
capital by recruiting retired government bureaucrats and achieving PC or PPCC membership both contribute to firm performance (Hu
and Xu, 2019).
This study presents the great complexity of the three effects of political connections in firms with different ownership. The policy
burden effect damages the fair competition between SOEs and private firms, while the investor protection effect, which is just a
temporary and informal substitute under poor and imperfect institutions, encourages fair competition between SOEs and private firms.
The government patronage effect, which distorts firm behaviors and leads to resource misallocation, induces an unfair competition
between politically connected and nonconnected firms, making rent seeking more attractive than productive activities. The compli
cacy of political connections on the economic behaviors of SOEs and private firms deserves to be further explored in future studies.
Author statement
Corporate Ownership and Political Connections: Evidence from Post-IPO Long Term Performance in China
We have revised this paper carefully and resubmitted the revised version to the journal for publication. All of the authors made
substantial contributions to the work reported in this manuscript.
Declaration of Competing Interest
We declare that we have no conflicts of interest to this work.
Acknowledgement
The authors would like to thank the anonymous referee and the editor for their helpful comments and valuable suggestions that led
to important improvements. All errors are our responsibility. This paper is supported by Tianjin Philosophical and Social Science
Foundation (tjyy17-001).
20
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Research in International Business and Finance 59 (2022) 101561

Contents lists available at ScienceDirect

Research in International Business and Finance

Full length article

Corporate ownership and political connections: Evidence from

market value in state- and family-controlled firms.

2. Hypotheses on political connections

2.1. Policy burdens

2.2. Investor protection

This table provides the definitions of the variables in this study.

2.3. Government patronage

3. Data and sample

4. Politically connected chairpersons and long-term firm performance

4.1. Between-group mean and median tests

4.2. Main regressions

Panel A: The full sample

Research in International Business and Finance 59 (2022) 101561

Panel A: The full sample

4.3. Robustness tests

4.3.1. Relative stock-based performance

4.3.2. Types of political connections

CAR CAR CAR CAR CAR CAR CAR CAR CAR

Panel A: Mean and median statistics

4.3.3. Potential endogeneity issues

POL 0.070 0.066

5. Short-term stock returns1

5.1. Short-term returns

5.2. IPO underpricing

IR Adj.IR IR Adj.IR IR Adj.IR

POL 0.078* 0.084** 0.120 0.140* 0.053 0.051

6. Three mechanisms of political connections

Panel A: State-controlled firms

Research in International Business and Finance 59 (2022) 101561

Pane A: State-controlled firms

Panel B: Family-controlled firms

Research in International Business and Finance 59 (2022) 101561

6.1. Policy burden

6.2. Investor protection

Panel A: State-controlled firms

ROA_PREIPO ROE_PREIPO ROS_PREIPO ROA_PREIPO ROE_PREIPO ROS_PREIPO ROA_PREIPO ROE_PREIPO ROS_PREIPO

Panel A: Mean and median statistics

Research in International Business and Finance 59 (2022) 101561

6.3. Government patronage

7. Politically connected chairpersons and firm economic performance

7.2. Effect of political connections of the board chairpersons on accounting performance

Panel A: Mean and median statistics

Research in International Business and Finance 59 (2022) 101561

8. Discussion and conclusions

Declaration of Competing Interest

We declare that we have no conflicts of interest to this work.

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