Capital province, political objectives and the post‐IPO policy burden

Abstract

Purpose

The purpose of this paper is to analyze the reason for Chinese local officials' enthusiasm towards cultivating newly listed firms within their jurisdictions.

Design/methodology/approach

With new initial public offering (IPO) firms on the Chinese A‐share market over 1999‐2003 as samples, and using excessive employment as a measure of the carrying level of firms for political objectives of local governments, this study systematically investigates the change in policy burden for Chines firms before and after going public, the influence factors and their economic consequences.

Findings

The authors show that compared with before going public, the excessive employment of firms substantially increased upon going public, among which firms, state‐owned enterprises with better performances and private enterprises with closer links with government are heavier burdened with excessive employment. Furthermore, it was found that the increase in excessive employment upon going public can substantially aggravate the underperformance of IPO firms.

Research limitations/implications

The findings in this study indicate that the new IPO firms do help local officials better realize their political objectives, and the local governments do actively use their rights of control or influence in pursuing their political appeals, and the political appeals of local officials brought loss of real economic efficiency to newly increased IPO firms.

Practical implications

This paper shows that the prime mover of Chinese local government in promoting securitization of local assets is effectively preserved by partial privatization, which is designed with the original intention of preserving governmental control over the economy.

Originality/value

The paper explains the Chinese local governments' enthusiasm for building capital provinces for reasons other than economic growth, i.e. political objectives; the paper provides evidence of how the political appeals of officials influence the capital market from the circumstance of government official selecting system, and builds a possible bridge in the relationship between government interventions and underperformance of the Chinese partially‐privatized firms.

Citation

Sun, L. and Liu, C. (2012), "Capital province, political objectives and the post‐IPO policy burden", China Finance Review International, Vol. 2 No. 2, pp. 121-142. https://doi.org/10.1108/20441391211215815