Sample selection

Through prospectuses, the press, financial websites and professional stock analysis software, this study identifies political connections by identifying the insider person who has a special close relation to a top central government or party leader, or other high- ranking public official (minimum at the provincial level). The relation features the involvement of top leaders’ younger generation, and so this study refers to this political connection as the “princelings” connection. The manually collected data is unique, as it enables us to substantiate the occurrence of the connection with princelings’ families in China.

3.3.2.1 Political connection to state leaders

The princelings are the descendants of prominent and influential senior Communist officials in the People’s Republic of China. As children or grandchildren of China’s top government officials, they are often considered by the public as belonging to privileged

classes with strong political and financial clout. Normally, they hold prominent positions in strategic industries, which allow them to be associated with a public firm.

Despite the fact that princelings are well known through their special roles in business, the origins of the firm’s connection to them are often very difficult or impossible to trace. There are two reasons for this. First, few public sources of these links are available. Most princelings are very careful to keep a low profile. Being from famous families, if their relationships are exposed they may receive very high scrutiny from the public. Second, there are regulations setting limits on the business activities of the top Chinese leaders26. In order to maintain a reputation of integrity, princelings’ families may desire more secrecy and prohibit related firms from releasing the information on any connections to the public. Perhaps because of these reasons, this study finds firms connected to such families have complicated pyramidal and cross-holding structures. Such ownership structures mean that connectedness effectively escapes the eyes of the public.

To identify the firms connected to political elites of princelings, in this study the connected samples are had collected using the following steps. First, this study has identified these connected firms largely based on anecdotal evidence from many forms of public sources, mainly via public domains on the internet. The study then proves the presence of political connections by examining information from three sources; prospectuses, the official press, and financial websites27.

As the most important instrument of legal documentation, an IPO prospectus provides basic information on the top officers, the backgrounds of the founding investors, the top 10 shareholders and the company history. This study includes a company in the sample if top officers (including the chairman, director, CEO, president, vice-president and secretary) or companies’ top 10 shareholders or founding investors are related to powerful politicians or military officers.

From the prospectus, this study finds some firms already have some political connections before the IPO in the form of venture capital raised by close relatives of powerful

26_{In the past three decades, the Chinese government has put in place more than 20 regulations to clearly}

prohibit officials and their relatives from participating in the business world. Please refer to the website: http:// news.sohu.com/20150303/n409303031.shtml

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politicians. Usually venture capital plays a key role in supporting the growth of young firms. According to a study of the venture capital industry in China by Bruton and Ahlstrom (2003), reputation and relationships are the norm in all stages and phases of venture capital development. Hence, this study includes firms funded by venture capital related to politicians in its politically connected samples.

Additionally, this study finds that some firms’ final controllers are foreign legal entities without clear description in the prospectus. This study cannot obtain the filings of these legal entities’ registry information from the Commercial Bureau, because they are registered overseas28. However, from internet searches, this study finds a media outlet named ‘Southern Weekend’29verifies this connectedness. This media reveals that there are some non-state owned companies with indirect connections to current or former high ranking public officials.

Besides evidence from prospectuses and the press, Chinese local financial websites30are other sources of data on political connections. Specifically, this study includes firms as politically connected if the names of the firms’ top officers are exactly the same as that found in anecdotes, or the profiles showing their political working experience. However, due to the limitation of these public sources and the authors’ limited search ability, this study does believe it still misses some existing politically connected firms in relation to the top leaders.

3.3.2.2 Political connection to other high-ranking public officials

Although there are regulations that forbid public officials from participating in non-state owned businesses, retired officers, especially those who formally had high ranking in government or military, are frequently recruited by non-state owned companies. Their former status still has the potential to influence the firm’s performance and increase its market value.

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This study finds that the British Virgin Islands, Cayman Islands and Bermuda are home to these offshore companies. Moreover, a small proportion of the offshore companies are registered in Hong Kong.

29_{Southern Weekend is famous for muckraking in China.}

30_{http://finance.sina.com.cn is one of the biggest websites for information on finance and the economy in}

It is easier to obtain data for firms connected to other high-ranking public officials through official channels. This study manually collected the data from two sources, one of which is the professional stock analysis software Tdxw, which provides us with background information about top officers (including the chairman, directors, CEO, president, vice- president and secretary) and top 10 shareholders. This study has classified firms as having connections as long as one of the top officers or large shareholders has political or military working experience31. The other source is the Hu Run Report, which is a source of information for private entrepreneurs who have close relationships with local government.

One may confuse state ownership as being comparable to political connections in the Chinese stock market as, to some degree, state-owned companies represent political connections. However, under a “partial privatisation” initiative in the early 1990s, state- owned enterprises are allowed to sell shares to private investors. Thus, a considerable number of state-owned firms became privately controlled businesses during this study period. Moreover, State-owned enterprises are less likely to be successful if they have no strong political connections (B. B. Francis et al., 2009).

It may be worth pointing out that government controlled firms are not included in the definition of the type of political connections, unless a government minister or a member of the parliament sit on their boards or own large stakes in the company.

The princelings samples are those connected firms where the influence may not be limited to routine operating decision making, but where the general advantage is in production and financing sources, including manpower capital. The “helping” hands and “grabbing” hands theories are equally applicable. This is exactly the empirical question investigated in this study.