External Governance Oversight and the IPO Process: Empirical Evidence from China

Abstract

AbstractThis study examines the effects of political affiliations as an external governance element on various aspects of the IPO procedure in China. Within China, the significance of political connections is widely recognized as a notable external governance factor capable of exerting influence over both the IPO process. Utilizing a distinctive dataset comprising IPO information from 1856 firms in China spanning the period between 2014 and 2021, the primary objective of this research is to demonstrate that companies with political affiliations have a higher probability of experiencing underpricing, coupled with an increased likelihood of attracting investments from retail investors. Furthermore, these firms tend to attract prestigious underwriters and more underwriter subscriptions, despite having to pay higher floating costs and underwriting fees. Lastly, the study demonstrates that political connections are especially beneficial for firms during market uncertainty, such as the recent pandemic. Political connections act as monitors, reducing information asymmetry and signaling positive aspects of the firms to investors. To strengthen the main conclusions, the study conducts various robustness tests, including PSM and subsample analysis. Overall, the research adds to the existing literature on the crucial role of political connections in promoting IPO practices and reducing information asymmetry through monitoring and support.