The effect of political connections on acquisition-evidence from Chinese nonSOEs

Abstract

Using a sample of 324 acquisition deals originated by nonstate-owned enterprise (SOE)-listed companies to acquire nonSOE private firms in China, we find that politically connected firms are more successful at acquiring high-quality local businesses than firms without political connections. The capital market gains from these acquisition activities, as measured by cumulative abnormal return (CAR), are significantly higher in both the short term and long term for politically connected firms, than for nonconnected firms. Investors holding stocks of politically connected companies that conduct acquisitions also gain more in both the short and long term, as measured by buy-and-hold return (BHAR). Additionally, the market performance of firms with higher level of political connections is significantly better than that of others with lower level of connections. The preferential policies and a certain range of freedom local government can exert to acquisition counterparties may explain the results. This study contributes to the merger and acquisition (M&A) literature by examining the impact and mechanism of political connections on acquiring companies in the context of a transition economy, China, and discloses the importance of political connections even for market-oriented deals such as M&As between nonSOE counterparties. Our study also finds that corporate governance (CG) positively moderates the role of political connections of acquirer in acquisitions.

Keywords:

• political connections
• acquisition
• China
• nonSOE
• corporate governance

JEL Classification:

• G34
• G38
• M21

Notes

¹ There are no merger deals because normally listed companies are much larger than the target companies in scale and in such a case, acquisition is the choice. Acquisition deals of listed companies to acquire nonlisted companies are subjected to the rules of the third chapter of Corporate Law of China. According to the listed rules of Shanghai Stock Exchange and Shenzhen Stock Exchange, listed companies are required to disclose the acquisition deals.

² http://xxgk.wenzhou.gov.cn/

³ The major strategic thoughts advanced by the Chinese Communist Party under the leadership of General Secretary Hu Jintao.