Political Connections and Merger Performance: Evidence from Chinese Market

In this paper, we examine the role of political connections by analyzing the short-and long-term performance of Chinese state owned enterprise (SOE) acquirers relative to private owned enterprise (POE) from 1994 to 2008. The empirical result shows that 1) SOE acquirers outperform the POE acquirer both in terms of long-run stock and operating performance; 2) announcement effect of POE acquirer taking over SOE target is significantly positive; 3) SOE-related mergers have superior stock performance during hot political periods. Moreover, our evidence shows that SOE acquirers have higher operating margin but lower asset turnover, suggesting the outperformance of SOE acquirers are due to their superior profitable business instead of efficient usage of asset. Compared to POE acquirers, SOE acquirers also have lower leverage ratio, higher quick ratio as well as more asset value. These finding suggest that the value of SOEs acquisitions is derived from government financial and policy support because of their political connections.