Does the Chinese Government Value Good Firms? Evidence from P-Chips and Red-Chips Listed in Hong Kong

Abstract

The very long line of Chinese firms waiting to be approved for listing on the Chinese stock exchanges provides a context for testing whether the Chinese government picks the best (largest and most profitable) firms for listing on the Chinese stock exchanges. Capital-hungry Chinese firms that are not approved for listing on the Shanghai and Shenzhen Stock Exchanges frequently choose to reorganize themselves as overseas corporations, followed by listing on the Hong Kong Stock Exchange. These overseas corporations with mainland Chinese operations and Hong Kong listings are called "Red-chips" if they are predominantly state-owned entities (SOEs) and "P-chips" if they are not SOEs. We propose that the Chinese government granted approval to raise equity capital domestically to those firms with better political connections (the political connectedness hypothesis) and/or to those firms with better performance and prospects (the performance hypothesis) We find that different hypotheses are consistent with the results for SOEs than with the results for Non-SOEs. We find that the political connectedness hypothesis holds for the SOEs, and the performance hypothesis holds for the Non-SOEs. We conclude that the Chinese government has approved more politically connected SOEs and more profitable Non-SOEs to list domestically.