Corporate ownership and political connections: Evidence from post-IPO long term performance in China

Abstract This paper constructs a practical framework to illuminate how political connections influence the material performance of initial public offerings (IPOs) for Chinese firms. An important dimension of the paper is to decompose the effects of political connections into three types: (i) policy burdens, (ii) investor protection, and (iii) government patronage, ascribed to the grabbing hand, the 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.