Zhang, Aoran (2019) Three Essays on the Role of Political Connections in Corporate Finance. PhD thesis, Concordia University.
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Abstract
This dissertation investigates the influence of political connections on corporate financing activities in China. The thesis consists of three chapters. In the first essay, we explore whether and how political connections affect the likelihood of completing a cross-border M&A deal for Chinese publicly listed, but privately-owned enterprises (POEs) and the resulting firm performance. In line with the proposed political connection trade-off theory, we demonstrate that POEs with politically connected top managers are more likely to complete a cross-border M&A deal than POEs with no such connections, but that this comes at the cost of negative announcement returns and subsequent lower accounting performance. These findings support the idea that politically connected top managers engage in empire building behavior at the cost of shareholders’ wealth.
In the second essay, we examine how political connections influence the likelihood of corporate bond issuance for POEs in China. Using a sample of Chinese POEs from 2007 to 2016, the research shows that politically-connected POEs are more likely to issue corporate bonds as a debt-financing instrument than their non-connected counterparts, and that they achieve lower coupon rates (i.e., lower refinancing costs). On the other hand, this research indicates that corporate bond-issuing POEs in China have weaker corporate governance and a surprisingly higher default probability. Overall, the results show that the corporate bond market in China is strongly distorted by political factors.
In the third essay, we study how implicit government guarantees affect the yield spreads of Chinese corporate bonds. We presume that quasi-municipal corporate bonds (so called “Chengtou” bonds), issued by local government financing vehicles (LGFVs), carry an implicit government guarantee. Using a sample of publicly traded corporate bonds between 2010 and 2017, we find that bond investors are significantly less sensitive to bond-specific risks for corporate bonds with an implicit government guarantee: the yield spreads of Chengtou bonds are significantly lower than those of corporate bonds issued by POEs in China. We also find that corporate bonds from Northeast China are riskier than those issued by firms elsewhere in the country. Furthermore, we discover that policy changes introduced by the central government, which were intended to regulate local debt financing activities, significantly reduced the gap in yield spreads between Chengtou bonds and bonds issued by POEs. Overall, the empirical results suggest that implicit government guarantees play a crucial role in corporate debt market and that China's recent policy changes reduce the effectiveness of implicit government guarantees, making corporate bond market more market-oriented.
| Divisions: | Concordia University > John Molson School of Business > Finance |
|---|---|
| Item Type: | Thesis (PhD) |
| Authors: | Zhang, Aoran |
| Institution: | Concordia University |
| Degree Name: | Ph. D. |
| Program: | Business Administration (Finance specialization) |
| Date: | April 2019 |
| Thesis Supervisor(s): | Walker, Thomas |
| Keywords: | China, Corporate Finance, Emerging Markets, Political Connections |
| ID Code: | 985544 |
| Deposited By: | AORAN ZHANG |
| Deposited On: | 14 Nov 2019 15:37 |
| Last Modified: | 17 Feb 2021 00:51 |
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