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Chinese State-Owned Enterprises and Foreign MarketsJune 15, 2012
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Recent study co-authored by USC Marshall School of Business professor finds heads of politically connected companies influenced more by private ambitions than shareholder returns
Chinese state-owned enterprises with strong political ties may be more likely to list overseas than less politically connected firms, but, a new study shows, they seem to do so less for financial return than for private political gain.
The study, “Political Considerations in the Decision of Chinese SOEs to List in Hong Kong,” co-authored by Mingyi Hung, Arthur Anderson & Co. Alumni Professor of Accounting at USC's Marshall School of Business, found that politically connected firms that listed overseas performed worse than non-connected firms. Politically connected firms were defined as those that had a chairman or CEO that was a current or former government bureaucrat. In fact, politically connected firms stock price performed 52 percent lower than their less connected counterparts during the three years after listing overseas, and they also exhibited less sales growth before listing overseas.
However, the study, published in the Journal of Accounting and Economics, showed that connected firms' managers derived considerable private benefits, such as political media coverage or promotion to a senior government position, subsequent to overseas listing than domestic listing. Thus, the politically connected firms seemed less concerned with optimizing shareholder value than their own personal gains when going overseas.
Chinese SOEs that enter into initial public offerings (IPOs) represent a huge sector in the economy. In recent years, China has dominated worldwide IPOs most notably with the world's largest IPO by Agricultural Bank of China (AgBank)'s $22 billion share issuance.
“They are big offerings with major interest from security regulators in exchanges around the world. So that's why we were interested. The biggest IPOs are state-owned enterprises in China,” said Hung.
To analyze the role political connections might play in overseas listings, the study, which Hung co-authored with T.J. Wong, dean, faculty of business administration, professor of accountancy and director of the Center for Institutions and Governance, and Tianyu Zhang, assistant professor and associate director of the Center for Institutions and Governance, both of the School of Accountancy at The Chinese University of Hong Kong Shatin, NT, Hong Kong, assembled data on Chinese SOEs listed on worldwide (domestic and overseas) stock exchanges during the period 1992 to 2005. Among the sample of 1,018 firms, 939 listed only on domestic stock exchanges (Shenzhen and Shanghai stock exchanges).
Hung and her fellow researchers tested two theories in their study. First, they examined whether politically connected firms – which they found were twice more likely to list overseas – exhibited better performance than their less connected counterparts after entering foreign markets. Second, they tested whether managers of connected firms used overseas listings to realize private political benefits for themselves.
To understand what made them continue to want to list overseas despite such poor returns, Hung and her colleagues delved into other benefits the heads of Chinese SOEs might receive from doing so. Researchers used two proxies to judge private political benefits: political media visibility and political promotion. Political media visibility was defined as non-negative news coverage of a firm's chairman or CEO in the People's Daily – the official Communist Party newspaper – within the five years following the listing. People's Daily was chosen because it is a high-ranking political newspaper and, its coverage is more likely to be noticed by national leaders than that of other lower-ranking media. Political promotion as a dummy variable indicated whether the chairman or CEO was promoted to a senior government position subsequent to the listing.
The researchers found that for overseas listed firms (compared to domestically listed firms), the odds of receiving media coverage will increase by three times and the odds of receiving political promotion will increase by five times.
“Politically connected firms have their own results, explanations, and their managers have their own career paths in mind. They want to become a government official down the road. They will have more incentive to satisfy other social objective functions the government has, employment rates, those kind of things but not necessarily from a shareholders perspective to maximize profit. So they can have different incentives that explain why their firms under perform relative to other firms,” said Hung. “There's a very strong link between the corporate sector and the political sector in China. It's pretty often that after you serve as a CEO of a big corporation, you become a top government official. You get promoted politically.”