Politics and political connections are known to play a role in the privatization of state-owned enterprises (SOEs). New research shows they also play a role in the overseas listing of Chinese SOEs, as managers of more politically connected firms benefit in terms of media recognition and promotion to senior government positions after they list.

The findings were made by Mingyi Hung, T.J. Wong and Tianyu Zhang, who studied a sample of more than 1,000 SOEs and found that politically connected firms (defined as the CEO or chairman having strong government affiliations) were more likely to list overseas. A total of 79 of these firms listed overseas, representing 11 per cent of those with strong political connections and only five per cent of those without. The authors had asked, what could be the reason for this disparity?

“We proposed two hypotheses. First was the performance hypothesis, which states that politically connected firms perform better than non-politically connected firms subsequent to overseas listing. The rationale for the higher listing ratio would be that the connected firms can derive significant benefits such as government subsidies or state loans,” they said.

“The other hypothesis was based on private benefits – that managers of politically connected firms use overseas listings to realize private political benefits. Due to strong government intervention in the corporate sector in China, an executive position in a large Chinese SOE often leads to a promotion to a senior government position. Overseas listing can therefore provide managers of connected firms with a new channel to realize political rents.”

Their data provided strong evidence for the latter hypothesis. The non-politically connected firms had better post-listing performance and greater profitability than connected firms after listing overseas. Yet managers of politically connected firms were more likely to be recognized in the political media or promoted to a senior government position within five years after listing.

To strengthen this finding the authors also looked at growth prior to listing. Politically connected firms were no better in terms of growth potential and non-connected firms, which demonstrated they were no more deserving of an overseas listing.

Earnings management activity was also tested, but the authors found no evidence that it had a role in firm performance after listing overseas.

All of this supported the private benefits hypothesis, which had wider implications. “This finding adds to our understanding of the managerial labor market in China by showing SOE managers’ political career concerns can drive a wedge between the interests of these managers and minority shareholders,” they said.

The authors added that the findings should be seen in light of the special circumstances of overseas listings for Chinese firms. Some 78 of the 79 SOEs listing overseas had listed on the Hong Kong stock market, 14 in New York and five in London (some listed in more than one market).

“Although Hong Kong has high-quality governance institutions that can lead to bonding effects for non-connected firms, its political dependence on China can also enable politically-connected managers of Chinese SOEs to extract private benefits upon listing there,” they said.