Preliminary draft, please do not quote
For the Common Good? The Effects of Private
Entrepreneurs’ Political Participation in China
Xunan Feng
City University of Hong Kong
Anders C. Johansson*
Harvard University
Stockholm School of Economics
Tianyu Zhang
City University of Hong Kong
November 2010
*
Corresponding author, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm,
Sweden. Phone: +46-8-736 9360. Fax: +46-8-31 30 17. Email: anders.johansson@hhs.se. Johansson
acknowledges financial support from the Bank of Sweden Tercentenary Foundation (RJ), the Swedish
Foundation for International Cooperation in Research and Higher Education (STINT), and the Swedish
School of Advanced Asia-Pacific Studies (SSAAPS).
For the Common Good? The Effects of Private
Entrepreneurs’ Political Participation in China
Abstract
We study the benefits of private entrepreneurs entering into politics in China. Using
original hand-collected data on political participation of entrepreneurs that control listed
firms, we document evidence of rent seeking through their political networks and several
potential channels through which rent seeking is realized. It is shown that political
participation results in increased stock performance and operating performance, consistent
with the rent-seeking argument. As rent-seeking channels, firms controlled by politically
active private entrepreneurs are able to access debt financing better, lessen their tax burden,
and engage in favorable M&A activities, at least partly explained by better access to
regulated industries. This study thus sheds light on the benefits of political participation for
private entrepreneurs in China and, more importantly, document several channels used to
exploit political networks built up through active participation in politics.
JEL Classification: G30; G32; G34; H20; P26
Keywords: Political participation; Entrepreneurial firms; Corporate governance; Rent
seeking; Capital structure; Tax burden; Mergers and acquisitions; Regulated industry;
China
1 1
Introduction
Do private entrepreneurs become politically active for the good of society? Or
do they enter into politics looking for preferential treatment and access to rent-seeking
opportunities? A small but growing literature has studied private entrepreneurs that
participate in politics in transition economies. The focus in most such studies is
mainly on the potential effects on firm value and operating performance. There are
only a few studies that identify and test the significance of different potential rentseeking channels that politically active private entrepreneurs may exploit through
their political connections.
This paper examines the valuation effect of political participation by private
entrepreneurs in China and analyzes several rent-seeking channels that lead to such an
effect. By identifying when a private entrepreneur enters into politics, we are able to
explore the potential benefits of doing so, and the channels through which the
entrepreneur may exploit his or her new political position. Such potential rent-seeking
channels include better access to capital, preferential tax treatment, and superior
access to regulated industries through corporate deals. China is perhaps especially
well suited for our study. Chinese private entrepreneurs have been politically active
for a long time, especially so after the then President Jiang Zemin welcomed them
into the Chinese Communist Party (CCP) in 2001. In a business environment marked
by poor legal protection, ambiguous property rights, and rent seeking, many Chinese
private entrepreneurs have tried to develop close ties to local and national politicians.
2 It is therefore valid to raise the question whether they enter into politics for the
common good or mainly to exploit rent-seeking opportunities otherwise not available
to them. To understand the workings and effects of entrepreneurs’ political
participation we thus (1) examine the effect of political participation on a firm’s longterm stock performance and operating performance; and (2) study different potential
rent-seeking channels made available through political participation.
To analyze political participation, we identify when an entrepreneur (or one of
his or her family members) becomes a member of the Congress of the Chinese
Communist Party (CCCP), the National People’s Congress (NPC), the Chinese
People’s Political Consultative Conference (CPPCC), or any of their provincial
counterparts. Our hand-collected data set covers all listed entrepreneurial firms during
the period 1993-2009. For this period, we find 73 cases of private entrepreneurs
controlling listed firms that have entered into politics. We then perform an event study
based on the point in time when a private entrepreneurs becomes a member of any of
the political state entities mentioned above. We find that political participation has a
significant positive effect on long-run stock performance and that this effect increases
over time during an extended period after the event. We also document that political
participation has a significant positive effect on several accounting measures of
operating performance.
Having identified the positive effects of political participation on firm
performance and firm value, we then explore several potential channels through
which political participation enables such effects. Political participation facilitates
3 debt financing as indicated by higher leverage and longer maturity in debt for firms
controlled by politically active private entrepreneurs. Political participation also
improves the access to regulated industries through merger and acquisitions (M&As).
Finally, political participation reduce firms’ tax burden measured as the effective tax
rate.
Overall, our empirical findings provide a picture of the significant benefits that
stems from political participation by private entrepreneurs becoming in China. In
addition to documenting the effects on firm value and operating performance, we are
able to identify several channels through which politically active entrepreneurs are
able to exploit their rent-seeking opportunities. These results have important
implications for the literature on the relationship between entrepreneurs and the
political sphere and rent seeking in transition economies.
The remainder of this paper proceeds as follows. Section 2 provides a review
of the related literature on rent seeking and how entrepreneurs use political affiliations
to improve their business. Section 3 discusses the institutional background and the
relationship between private entrepreneurs and politicians in China. This section also
develops the hypotheses for the empirical analysis. Section 4 describes the data
sample and presents the initial empirical results of the effects on firm value and
operating performance. Building on these results, Section 5 then analyzes the different
rent-seeking channels. Finally, Section 6 concludes the paper.
4 2
Literature Review
This paper relates to research that focuses on rent seeking and how
entrepreneurs use their political ties to benefit their businesses. In her seminal article,
Krueger (1974) argues that it is natural for firms to devote economic resources toward
rent seeking in order to compete for favorable policy decisions. In general, politicians
are able to influence firms through a variety of policy decisions. Politicians may do
this for political as well as personal objectives (e.g., La Porta et al., 2002; Rajan and
Zingales, 2003). Government decisions can have a significant effect on firm
performance and firm value through various channels, such as preferential access to
finance, better access to different forms of government subsidies, tax benefits, and
reduced regulatory constraints.
Numerous studies have analyzed how political connections play an important
role for U.S. firms, including Roberts (1990), Kroszner and Stratmann (1998),
Jayachandran (2006), Knight (2006), Benmelech and Moskowitz (2007), Goldman et
al. (2009), and Cooper et al. (2010). Besides research on the U.S., there is a small but
growing literature on the importance of political relationships in other countries.
Faccio (2006) performs a cross-country analysis on firms with political connections.
She finds that such firms are more likely to be listed in countries with higher levels of
corruption and weaker legal systems. Fisman (2001) documents the effects of
announcements about the health condition of the former President of Indonesia,
Suharto. He shows that companies with close ties to the Suharto family experienced
abnormal losses in market value after news of Suharto’s deteriorating health was
5 published. Johnson and Mitton (2003) study the decision by Malaysia’s Prime
Minister Mahathir to fire the Deputy Prime Minister Anwar Ibrahim and impose
capital controls after the outbreak of the Asian financial crisis. They find that firms
with close ties to Mahathir benefitted greatly as a result of the capital controls. Faccio
et al. (2006) show that politically connected firms are more likely to be bailed out by
the government during times of distress. Fan et al. (2007) analyze how political
connections affect firm performance after partial privatizations and public offerings of
Chinese state-controlled firms. They find that political connections affect firm
performance and market value negatively, indicating that politicians continue to
extract resources from state-controlled companies after they have been partially
privatized. Finally, Claessens et al. (2008) analyze the Brazilian 1998 and 2002
elections. They document that higher campaign contributions result in higher stock
returns around announcements of election results.
Even though most research on political relationships and rent seeking has
focused on finding evidence for firm effects, a limited number of recent studies have
tried to identify potential rent-seeking channels. The channel that has been analyzed
most thoroughly is that of preferential access to financing. Faccio et al. (2006),
analyzing firms in 35 different countries, find that politically connected firms tend to
have higher leverage ratios. Johnson and Mitton (2003) show that politically
connected firms in Malaysia had significantly higher debt-asset ratios before the
Asian financial crisis and that they had less short-term debt, indicating that politically
connected firms have better access to long-term debt financing. Dinc (2005) looks at
6 the behavior of banks in developing countries. By focusing on political elections, he
finds that political motivations are a part of government-owned banks’ decisionmaking process. Khwaja and Mian (2005) analyze politically connected firms in
Pakistan. They find that such firms have preferential access to loans and that they
borrow twice as much as other firms. As a result, politically connected firms in their
sample exhibit much higher default rates. Charumilind et al. (2006) analyze firms
with strong connections to politicians and banks in Thailand. They find that such
firms had significantly better access to long-term debt before the financial crisis
erupted in 1997. While these initial studies on rent-seeking channels made available
through political connections are important, our study provides a more comprehensive
picture. In addition to analyzing capital structure changes due to political
participation, we are able to identify other channels that politically active
entrepreneurs in China are able to exploit, such as increased tax benefits and access to
beneficial corporate deals.
3
3.1
Institutional Background and Hypotheses
Private Entrepreneurs and Politics in China
Private entrepreneurs did not constitute a major part of early economic
reforms in China. From 1978 up to 1988, the first form of private enterprises that was
allowed, so-called getihu, was restricted to have no more than eight employees.
During this period, private entrepreneurs basically played a somewhat limited role in
7 an experiment in which the Chinese government tried to come to grips with how
private businesses could function besides state-owned enterprises (SOEs). As a result,
early private entrepreneurs were only allowed to do business in sectors previously
ignored by larger SOEs. As they became increasingly important, private firms with
more than eight employees (siying qiye) were allowed in 1988. During the second half
of the 1980s, things seemed to progress fast. However, after the Tiananmen
demonstrations in 1989, private entrepreneurs experienced a negative setback in the
treatment they received from the government, after an event that most of them did not
take part in. The CCP imposed a formal ban stating that private entrepreneurs were
not allowed to be members in the party. Private entrepreneurs had been discriminated
against by the state and its different entities before, but after Tiananmen Incident, they
had to function in a more difficult business environment.
Albeit discriminatory practices were more or less the norm when dealing with
private enterprises, the private sector boomed during the 1990s. Deng Xiaoping’s
southern tour (nanxun) in 1992 also marked a change in the treatment of private
entrepreneurs. A wave of new economic reforms came to change the role
entrepreneurs played in the domestic economy. For example, the Chinese Company
Law was established in 1994, a first serious attempt to clarify the functions of both
state-owned and private enterprises. In the mid-1990s, the restructuring (gaizhi) of the
previously so important township and village enterprises (TVEs) had begun, a process
that soon increased in speed. Also, a major change in how the Chinese regime sees the
private sector was introduced in 1999, when it was stated that “individual, private and
8 other non-public economies that exist within the limits prescribed by law are major
components of the socialist market economy” (Tsai, 2006). In 2001, the former
Chinese leader Jiang Zemin declared that private entrepreneurs should be allowed to
join the CCP. This was reiterated formally during the 16th Party Congress the
following year, showing how important the private sector had become for the country.
In 2005, there were approximately 30 million registered private companies in China.
The same year, they accounted for approximately half of China’s total GDP (Tsai,
2007). Dougherty et al. (2007) find that the private sector increased in importance at
the turn of the century. In their study based on a data sample comprised by
approximately 250,000 companies, it is shown that private firms share of total
industrial product increased from 25% in 1998 to over 50% in 2003. It was this
change that Jiang Zemin acknowledged: private firms with their much higher average
productivity compared to SOEs continued to fuel the Chinese economy.
Regardless of the increasing acceptance of private entrepreneurs, they have
been significantly discriminated against for a long period of time. Entrepreneurs that
tried to build up their business during the early period of the economic reforms had to
rely on creative solutions to overcome such discrimination. For example, a large
number of private enterprises called “red-hat” (dai hongmaozi) firms registered as
publicly-owned firms as a way to disguise their true ownership (Tsai, 2007). It comes
as no surprise then that many private entrepreneurs have chosen to become politically
active at least partly to ensure better treatment by local and state officials.
Entrepreneurs that become members of the CCP are often called “red capitalists”
9 (Dickson, 2003). In this study, however, we focus on entrepreneurs that not only
become passive members of the CCP, but also choose to participate in politics at the
local or national level. It should be noted that while the number of politically active
private entrepreneurs is growing fast, it does not necessarily mean that all of them
constitute private entrepreneurs that decide to become members of the CCP or
become more politically active. For example, if we were to define a politically active
private entrepreneur as a person that is also a member of the CCP, then most such
individuals were members of the party before they became entrepreneurs (Dickson,
2008). After the decision to formally accept private entrepreneurs to become party
members in 2002, people inside the CCP quickly became active in a plethora of
private business ventures. This move, often called to “jump into the sea” (xia hai), has
spurred the private sector to grow even faster. While members of this group of private
entrepreneurs are interesting in their own right, this study focuses exclusively on the
private entrepreneurs that choose to become politically active after having gained
control of a company.
3.2
Defining Political Participation
As mentioned earlier, this study focuses on entrepreneurs that enter into
politics while already controlling a publically traded company. Political participation
is identified for either the private entrepreneur or one of his or her family members.
Following the related literature (e.g. La Porta et al., 1999), we identify shareholders
who control more than 10% of the outstanding shares. Thus, for a company to be
10 defined as a firm controlled by a private entrepreneur, the entrepreneur or his or her
family control at least 10% of the its outstanding shares. We then use representation at
one of three key state entities as a proxy for political participation. The three entities
are: the Congress of the Chinese Communist Party (CCCP), the National People’s
Congress (NPC), and the Chinese People’s Political Consultative Conference
(CPPCC). We also include participation at the provincial level of any of the three
entities. Wright (2010) states that private entrepreneurs have shown considerable
interest in joining these state entities and we therefore believe that a position in one of
them constitutes a strong indication of political participation.1
The CCCP functions as the highest body within the Communist Party of China
(CCP). The congress is held only once every five years. The NPC functions as the
country’s legislative body and is formally the highest organ of the state. Finally, the
CPPCC functions as a political advisory body and it consists of members from
different parties and organizations as well as individuals.
While the CCCP is the only entity that is directly organized by the CCP, both
the NPC and the CPPCC are close to the party. The CPPCC has been used as a way
for the CCP to attract non-CCP members and increase the support of the party.
Shambaugh (2009) also argues that the CPPCC is becoming more systematically
involved in the party’s policymaking process. Members of both the NPC and the
1
See also Chen and Dickson (2010) for a detailed discussion on entrepreneurs’ participation in these
state entities.
11 CPPCC on different levels are approved by the CCP, which indicates the party’s
influence on these entities. It is widely recognized that the inclusion of private
entrepreneurs into the NPC and CPPCC is a way for the CCP to co-opt this
increasingly important class. At the same time, an entrepreneur’s decision to join one
of the state entities in question is more than likely at least partially based on the fact
that he or she gets access to a powerful political network. It is thus logical to assume
that political participation could be used for the benefit of privately controlled firms.
3.3
Hypotheses
The literature on political connections shows that connected firms often are
able to exploit their rent-seeking opportunities. The final outcome of such behavior
depends on whether the effects of political ties are dominated by rent-seeking or the
grabbing hand phenomenon. For example, Fan et al. (2007) show that listed SOEs in
China tend to be negatively affected by political connections, indicating that the
presence of politically connected people in management and on the board can be
detrimental to firm value. However, we are focusing on private entrepreneurs whom
have not been rewarded the position in their firm as a result of political connections.
We thus expect that the controlling entrepreneur’s decision to enter into politics has a
positive effect on firm value as well as operating performance. The following
hypotheses focus on the effects of political participation:
Hypothesis 1a: A privately controlled firm experiences a positive effect on
operating performance when the controlling entrepreneur becomes politically
active
12 Hypothesis 1b: A privately controlled firm experiences a positive effect on firm
value when the controlling entrepreneur becomes politically active
While the effects of political ties is analyzed in the research literature, less effort has
gone into identifying and analyzing channels through which entrepreneurs are able to
exploit rent-seeking opportunities. We identify and test several such channels. First,
previous studies have shown that political networks can improve firms’ access to
capital. In China, most capital is channeled through the banking system, controlled by
the state. For example, Fan et al. (2008) find a significant decline in leverage and debt
maturity ratios for firms connected to corrupted bureaucrats after corruption scandals
involving the bureaucrats become published. Political participation can thus result in
preferential access to debt financing.
Hypothesis 2a: A privately controlled firm experiences a positive effect on debt
financing when the controlling entrepreneur becomes politically active
Hypothesis 2b: A privately controlled firm experiences a positive effect on debt
maturity when the controlling entrepreneur becomes politically active
Second, close ties to politicians may facilitate preferential tax treatments. If this is the
case, we can expect the tax level to be negatively affected when the entrepreneur that
controls the company participates in politics.
Hypothesis 3: A privately controlled firm experiences a decrease in its tax
burden when the controlling entrepreneur becomes politically active
13 Third, political participation may result in political ties that provide better access to
corporate deals in the form of M&As. One potential effect of political participation is
thus that politically active entrepreneurs may obtain better access to certain regulated
industries. There are a number of industries that are heavily regulated in China,
including the energy, natural resources, and finance sectors. We can thus raise the
following hypothesis:
Hypothesis 4: Political participation by a the controlling entrepreneur has a
positive effect on a firm’s ability to enter regulated industries through M&A
deals
4
4.1
Data and Initial Empirical Analysis
Data and Sample Description
Our data set is comprised of all privately controlled listed firms on the
Shanghai and Shenzhen stock exchanges from 1993 to 2009. Firms with a private
citizen controlling at least 10% of the company are defined as privately controlled
firms. Panel A in Table 1 shows the total number of listed firms and the number of
privately controlled firms for each year during the sample period. The number of
firms controlled by private entrepreneurs is very modest during the 1990s, never
reaching above 10% of the total number of listed firms. During the following decade,
however, the ratio of privately controlled firms to the total number of listed firms
increases fast. In 1993, the total number of listed firms was 183, of which only six
14 were controlled by private entrepreneurs. In 2009, the total of listed firms had
increased to 1714, with no less than 659 firms that can be defined as firms controlled
by private entrepreneurs. This means that the ratio of firms controlled by private
entrepreneurs to the total number of listed firms increased from a mere 3.28% to an
impressive 38.4% over the sample period. This change mirrors the overall
development in the Chinese economy, in which privately controlled firms constitute
an increasingly important part, especially during the last decade.
Next, we look at political participation by identifying when the controlling
private entrepreneur or one of his or her family members becomes politically active
(i.e. a member of the CCCP, the CPPCC, or the NPC). Panel B in Table 1 presents the
distribution of private entrepreneurs that become active in any of the main political
entities listed above. As expected, none of the private entrepreneurs participated in
politics during the most of the 1990s. Four of them became politically active during
the last years of that decade comprising no more than approximately 2% of the total
number of listed privately controlled firms in China. After the official recognition of
the importance of the private sector and the formal acceptance of private
entrepreneurs into the CCP in 2001 and 2002, the number of private entrepreneurs
that controlled a listed firm increased quickly. In 2009, a total of 73 privately
controlled firms had access to a political network through the political participation of
the controlling entrepreneur or one of his or her family members. This constituted
11.1% of the total number of privately controlled firms, indicating that not only were
private entrepreneurs allowed to enter into politics, they themselves clearly found it
15 attractive to do so. While approximately 11% of the number of privately controlled
firms is substantial, it is clear that the Chinese government has a process of its own to
select which private entrepreneurs that are allowed to take higher-level political
positions. This selection procedure can be seen as contributing to the rent-seeking
process.
4.2
Political Participation and Firm Value
To analyze the effects of political participation, we analyze stock performance
around the time when the political participation of private entrepreneurs that control
listed firms begins. In order to be compare stock performance of our sample firms
with regular firms controlled by private entrepreneurs, we first identify matching
firms. Matching firms are selected based on size (in terms of sales) and industry in the
year of political participation. Table 2 reports univariate tests for stock performance in
both the sample with companies controlled by private entrepreneurs that entered into
politics (the research sample) and the matching sample. We use cumulative abnormal
market-adjusted stock returns (CARs) to analyze the effects of political participation.
The CARs are based on monthly returns and are calculated using returns from three
months prior to the controlling private entrepreneur enters into politics up to 12 and
24 months after the event, respectively. Market returns used to calculate the CARs are
the equally-weighted monthly returns including dividends of all stocks on the
Shanghai and Shenzhen stock exchanges. Panel A in Table 2 presents the mean and
median CARs for the two groups. The average 12- and 24-month CARs for the
16 matching sample are 6.1% and 8.4%, while the CARs for the sample composed of
firms controlled by private entrepreneurs that enter into politics have a much higher
average mean of 13.6% and 27.3%, respectively. The difference is significant for both
time lengths. These results show that firms controlled by private entrepreneurs that
decide to become politically active outperform their peers with an average of 7.5%
over a 12-month period and 18.9% over 24 months. The results also indicate that the
difference between the two samples seem to increase over time, which means that the
advantages of developing an extensive political network through political
participation is not a one-time effect, but rather something that benefits the firm over
a long period of time. To shed more light on the long-term effects of political
participation, we calculate CARs for every month up to two years after the event.
Figure 1 shows how CARs for the two sample groups develop over time. It is evident
that the benefits of political participation by the controlling private entrepreneur are
highly beneficial for the firm and that the positive effects are persistent.
To control for other variables that may influence our results, we again estimate
OLS regressions, this time using the 12- and 24-month CARs as dependent variables.
We include the same variables as when analyzing operating performance, i.e. Tobin’s
Q, leverage, size, and industry and year dummies. Panel B in Table 2 reports the
regression results. Even when taking additional influential factors into account,
political participation still has a significant and positive effect on long-run stock
performance, especially over longer periods, as indicated by size and significance of
political participation when the 24-month CAR is the dependent variable. We can
17 therefore conclude that political participation by controlling private entrepreneur has a
significant positive effect not only on operating performance, but also firm value.
These initial results support those of earlier studies on how firms may benefit from
strong connections with leading politicians (e.g. Fisman, 2001; Faccio, 2006; and
Ferguson and Voth, 2008). Having established that political participation is closely
related to increases in firm performance, next we focus on potential channels firms
controlled by entrepreneurs that enter into politics may exploit for additional rent
seeking.
4.3
Political Participation and Operating Performance
To further analyze the effects of political participation, we compare changes in
operating performance based on when the political participation of private
entrepreneurs that control listed firms begins. We focus on six different measures of
accounting-based operating performance. First, we define growth in assets, sales, and
earnings as the growth of average of each measure during three years before the
entrepreneur becomes politically active to the average of the year of the entrepreneur
entering into politics and the year after. Second, we define change in return on sales
(ROS), return on assets (ROA), and return on earnings (ROE) as the difference
between the average of each measure during three years before the entrepreneur
becomes politically active and the average of the year that the entrepreneur enters into
politics and the year after. Before moving on to the regression analysis, we perform
tests for differences in the mean and median of the two groups for all six operating
18 performance measures. Panel A in Table 3 presents the descriptive statistics and the
results of univariate tests for the different operating performance measures. All
variables are winsorized at top and bottom 5%. Both the mean and median of all six
measures are significantly higher for firms with controlling private entrepreneurs that
enter into politics. These initial results show that firms controlled by private
entrepreneurs that enter into politics experience a significant positive effect of their
new political network.
To control for a number of factors that have been shown to influence operating
performance in later regressions, we also include three additional variables that are
commonly used in the literature on operating performance: Tobin’s Q, measured as
the sum of total market value of equity and total net liabilities divided by total assets;
leverage, measured as the ratio of total liabilities over total assets; and size, measured
as the natural logarithm of total assets. We again test for differences in mean and
median between the group of politically entrepreneurs and the matching group. Both
the mean and median of Tobin’s Q is significantly larger for firms with politically
active entrepreneurs, indicating their greater growth potential. Similarly, politically
active entrepreneurs have significantly higher leverage, even though the difference in
the mean is only significant at the 10% level. While we revisit this topic in a later
section, it is worth noting that firms controlled by politically private entrepreneurs
have higher debt levels than other entrepreneurial firms. Finally, the mean and median
of firm size in the two groups are indistinguishable. This shows that the matching
19 sample mirrors that of our sample of firms controlled by private entrepreneurs that
enter into politics during the sample period.
To control for other variables that may influence our results, we estimate
ordinary least squares (OLS) regressions using each of the six measures of operating
performance as dependent variables. Panel B in Table 3 presents the results of the six
OLS regressions with political participation, Tobin’s Q, leverage, size, and industry
and year dummies as independent variables. The regression results show that firms
controlled by private entrepreneurs that enter into politics experience an improved
operating performance, regardless of whether or not the change in performance is
measured by growth in assets, sales or earnings, or the change in ROS, ROA, or ROE.
These results are consistent with the initial univariate results in Panel A and show that
political participation by the controlling entrepreneur results in a positive effect on a
firm’s operating performance.
5
5.1
Identifying Rent-Seeking Channels
Access to Debt Financing and Debt Maturity
We begin our analysis of potential rent-seeking channels by looking at debt
structure and debt maturity. Our hypothesis is that political participation results in
better access to debt financing with resulting changes in debt structure and debt
maturity. To do this, we look at two separate variables. For debt financing, we analyze
the change in total debt over total assets and the total debt plus accounts payable over
20 total assets. To examine how firms use their newly found political networks to change
their debt composition, we focus on the change in long-term debt over total debt and
the long-term debt over total debt plus accounts payable.
Panel A in Table 4 provides a description of the sample based on the debtrelated variables. The changes in debt financing indicate that firms controlled by
private entrepreneurs that become politically active experience a significant positive
change in the debt ratio. Total debt over total assets as well as total debt plus accounts
payable over total assets are larger in both the mean and median for the group of firms
with politically active entrepreneurs. This means that after the controlling
entrepreneurs enter into politics, their firms are able to increase their leverage more
than normal firms controlled by private entrepreneurs. Focusing on the changes in
debt maturity, it is evident that political participation increases long-term debt as
share of total debt plus accounts payable. These results support earlier studies that
find evidence of higher leverage ratios and better access to long-term debt for
politically connected firms (e.g. Johnson and Mitton, 2003, and Faccio et al., 2006).
Next, we perform regressions to examine whether the financing policies of the
firms in the research sample change after the controlling entrepreneur engages in
political participation. We control for a number of additional factors that are known to
affect financial leverage and debt maturity. In addition to the three controls we used
previously, we also include profitability, measured as earnings over total assets, and
collateral, measured as the ratio of net fixed assets over total assets. Finally, we again
include industry and year dummies. Panel B in Table 4 reports the regression results
21 with each of the four debt measures as dependent variable. Column 1 presents the
regression results with the leverage variable as the dependent variable. Both total debt
over total assets and total debt plus accounts payable over total assets are affected by
political participation and the effect is positive and significant, indicating that firms
with access to comprehensive political networks as a result of their controlling
entrepreneur becoming politically active experience a significant increase in leverage.
Looking instead at the changes in debt maturity, political participation has a
somewhat weaker effect. However, the effect is still positive and significant at the
10% level for change in long-term debt over total debt plus accounts payable. Longterm debt is thus positively related to political participation, indicating that firms
controlled by private entrepreneurs that enter into politics are able to shift to longerterm debt. The results show that the changes in leverage and debt maturity cannot be
explained away by changes in other corporate fundamentals or industry and year
effects. Overall, the findings in Table 4 demonstrate how debt financing behavior
changes as private entrepreneurs that controls listed firms in China decide to enter
into politics.
5.2
Tax Burden
To analyze the changes in taxes after an entrepreneur engages in political
participation, we focus on the effective tax rates (ETR). ETR is defined as the tax
expense minus deferred tax expense divided by earnings before interest and tax
(EBIT). For completeness, we also use two alternative ETR measures. For the first
22 alternative measure (ETR1), we divide tax expenses only with EBIT. For the second
alternative measure (ETR2), we divide the difference between tax expenses and
deferred tax expenses with total profit. Then, to analyze the effect of political
participation, we calculate the change in tax burden as the difference between the
average annual ETR during the year of the event and the year after event and the
average annual ETR for the three years before the event. We also include several
control variables commonly seen in the literature on tax rates: capital intensity,
defined as the net fixed assets over total assets, and inventory intensity, defined as
inventory over total assets. We also use profitability, defined the same as before.
Panel A in Table 5 reports the mean and median values of change in the three
different tax burden measures. Initial tests for difference in mean and median show
that firms with entrepreneurs that enter into politics exhibit a significant reduction in
tax burden. While the mean of ERT is slightly positive for firms controlled by
politically active entrepreneurs, its median is negative. The mean and median is
negative for both ERT1 and ERT2 for firms controlled by entrepreneurs that become
politically active. For the matching sample, only the change in ERT1 is negative.
When testing for differences in mean and median, the negative effect is significantly
stronger for the research sample, indicating that political participation enables firms to
lower their tax burden relative to similar firms in the matching sample.
Panel B in Table 5 reports the results of the different regressions with each of
the three tax burden measures as dependent variables. The independent variable of
interest is again political participation. The coefficient for political participation is
23 negative and significant for each of the three tax burden measures. To conclude, even
when controlling for various alternative factors that may influence the dependent
variables, our results show that political participation by the controlling private
entrepreneur eases tax burden.
5.3
Access to Regulated Industries through M&A Deals
We have established that political participation has a positive impact on
operating performance and firm value and that some of this effect goes through debt
and tax burden channels. Next, we study how political participation affects privately
controlled firms’ access to beneficial corporate deals, either through mergers or
acquisitions. To analyze the effects of such deals, we identify M&A deals by firms
controlled by politically active private entrepreneurs. As before, we match these firms
with corresponding firms controlled by private entrepreneurs who have not entered
into politics through any of the three state entities we use as proxies for political
participation. We then carry out a regression analysis that focuses on access to
regulated industries in China.
The first two panels in Table 6 present descriptive statistics focusing on M&A
deals for both sample groups. Panel A reports the firm characteristics. Approximately
39% of the total number of deals was carried out by firms controlled by entrepreneurs
that are politically active. The standard control variables are also included: Tobin’s Q,
leverage, and size. The characteristics of the M&A transactions are reported in Panel
B. We measure type of M&A with a dummy variable that is equal to 1 when the
24 transaction is based on equity purchase and 0 otherwise. The variable M&A size is
measured as the ratio of the transaction value to the size of the buyer. We also include
the dummy variable regulated industry which is equal to 1 if the target firm is active
in one of China’s regulated industries and 0 otherwise. A majority of the M&A
transactions are based on stock purchases. The average size of the target company
relative to the buyer is relatively modest at 7.7%. Finally, only a minority of the total
number of transactions involves deals in regulated industries, mirroring the fact that it
is difficult for privately controlled firms to enter certain sectors of the Chinese
economy.
To analyze the influence that political participation may have on gaining
access to regulated industries, we perform a logistic regression with the dummy
variable regulated industry as dependent variable. Besides political participation, we
include our standard control variables as well as industry and year dummies. Panel C
in Table 6 reports the results of the logistic regression. The coefficient for regulated
industry is highly significant and positive. We can therefore conclude that a firm that
is controlled by a private entrepreneur that has entered into politics is more likely to
carry out an M&A transaction in a regulated industry. This means that political
participation by private entrepreneurs in China can be used to gain access into
industries that are heavily regulated and often closed to the private sector.
25 6
Conclusion
This paper examines the effects when Chinese private entrepreneurs enter into
politics. We firsts identify all listed firms that are controlled by entrepreneurs and then
analyze the effects of the event of initial political participation. The event is thus
defined as the controlling private entrepreneur entering into politics through one of
three important Chinese state entities. Consistent with the literature on rent seeking
and political connections, we find that political participation has a positive effect on
operating performance and firm value. This indicates that private entrepreneurs are
able to exploit their newly developed political networks for rent seeking.
We then examine several potentially important channels for rent seeking. First,
we find that firms controlled by private entrepreneurs that enter into politics are able
to increase their leverage after the event. We also find that political participation has a
positive effect on long-term debt relative to total debt. These results indicate that
political participation results in advantages when it comes to access to debt financing
and thus affect capital structure choices. Our findings on the effect of political
participation on debt financing thus support recent research findings suggesting that
financing patterns are affected not only by factors at the firm or industry level, but
also on the country level (e.g. Rajan and Zingales, 1995; Demigurc-Kunt and
Maksimovic, 1996, 1998, 1999; Booth et al., 2001).
Second, we look at several alternative measures of tax burden. Our findings
show that political participation results in a negative effect on efficient tax rates
(ETRs). This indicates that private entrepreneurs in China are able to exploit the
26 networks they build up through political participation to lower the tax burden of their
companies. Third, we analyze how firms’ corporate deals are affected by political
participation. We find that political participation significantly increases the likelihood
of corporate deals in China’s regulated industries. This means that private
entrepreneurs are able to access certain industries by entering into politics.
Our paper makes important contributions to the literature on political
connections and rent seeking. First, we document how China’s private entrepreneurs
can choose to become a member of any of the major political entities and thereby
improve their firms’ value and performance through rent seeking. Second, and more
importantly, we identify several important rent-seeking channels that private
entrepreneurs are able to exploit through their political participation, including better
access to debt financing, reductions in tax burden, and better access to heavily
regulated industries in China. Our results should be useful when trying to understand
problems in other emerging markets with similar institutional features.
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31 Table 1 Sample
Panel A: Distribution of listed privately controlled firms
This panel presents the distribution of listed privately controlled firms by year during 19932009. Privately controlled firms refer to firms controlled by a private entrepreneur or his or
her family for at least three years.
Year
Number of all
listed firms
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
183
291
323
530
745
851
949
1088
1160
1224
1287
1377
1381
1434
1550
1626
1714
Privately Controlled Firms
Number
As percentage of all
listed firms (%)
6
3.28
17
5.84
19
5.88
28
5.28
42
5.64
53
6.23
71
7.48
96
8.82
119
10.3
152
12.4
213
16.6
291
21.1
324
23.5
404
28.2
519
33.5
576
35.4
659
38.4
32 Table 1 Sample (Continued)
Panel B: Distribution of firms controlled by entrepreneurs that participate in
politics
This panel presents the distribution of firms that are controlled by politically active
private entrepreneurs, which means that the entrepreneur (or one of his or her family
members) is a member of the National People’s Congress (NPC), the Chinese
People’s Political Consultative Conference (CPPCC), or the Congress of Chinese
Communist Party (CCCP).
Year
Number of entrepreneurial
firms
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total
6
17
19
28
42
53
71
96
119
152
213
291
324
404
519
576
659
3589
Firms controlled by politically active
entrepreneurs
Numbers As percentage of all entrepreneurial
firms (%)
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
2
3.77
0
0.00
0
0.00
0
0.00
1
0.66
27
12.68
0
0.00
0
0.00
0
0.00
0.19
1
42
7.29
0
0.00
73
2.03
33 Table 2 Political Participation and Stock Performance
Panel A: Univariate Tests
This table presents univariate tests for stock performance in a window of [-3,12] and
[-3,24] around the month of the beginning of political participation. The stock
performance measures are calculated as the monthly cumulative abnormal returns
(CARs), where the abnormal return is the market adjusted return. ***, **, and *
denote significance at 1%, 5%, and 10%, respectively.
(1)
CAR [-3 ,12]
Mean
(Median)
0.136
(0.157)
0.061
(-0.033)
0.075*
(0.156)*
1.65
(1.92)
73
Research Sample
Matching Sample
Difference
T-test
(Wilcoxon-Mann-Whitney Test)
N
34 (2)
CAR [-3 ,24]
Mean
(Median)
0.273
(0.335)
0.084
(0.058)
0.189***
(0.335)***
2.67
(2.85)
73
Table 2 Political Participation and Stock Performance (Continued)
Panel B: Multivariate analysis
This table presents the OLS regression results of the effect of political participation on
stock performance. The dependent variables are the cumulative abnormal returns
(CARs), measured as cumulated monthly market-adjusted return in a window of [-3,
12] and [-3,24], respectively, where the month when the controlling entrepreneur
becomes politically active is treated as 0. The independent variables include Political
Network, which equals one for the year of and one year after the entrepreneur enters
into politics and zero otherwise; Tobin’s Q, measured as the sum of total market value
and total net liabilities divided by total assets; Leverage, measured as the ratio of total
liabilities over total assets; Size, measured as the natural logarithm of total assets.
Industry dummy and year dummy are also included but not reported. All variables are
winsorized at top and bottom 5%. Robust t-statistics are given in parentheses. ***, **,
and * denote significance at the 1%, 5% and 10% level, respectively.
(1)
CAR[-3, 12]
0.050*
(1.76)
0.027*
(1.75)
0.118
(0.65)
0.051
(1.23)
-1.142
(-1.05)
Yes
Yes
146
0.063
Political Participation
Tobin’s Q
Leverage
Size
Intercept
Industry
Year
Observations
Adjusted R2
35 (2)
CAR[-3, 24]
0.161**
(2.25)
0.055**
(2.51)
0.129
(0.59)
0.103*
(1.70)
-2.172*
(-1.76)
Yes
Yes
146
0.078
Table 3 Political Participation and Operating Performance
Panel A: Descriptive Statistics and Univariate Tests
This table presents the descriptive statistics for both the research and matching sample and univariate tests for differences in means and medians.
The research sample is composed of private firms controlled by politically active private entrepreneurs. A matching firm is a firm of similar size,
measured with total sales, in the same industry as the firm in the research sample. The growth in assets (sales, earnings, or operating earnings)
are the growth rates of assets (sales, earnings, or operating earnings) from the average annual assets (sales, earnings or operating earnings) from
the period of three years before to the average during the period of the year of the vent and the year after the controlling entrepreneur becomes
politically active. ROS (ROA or ROE) is the difference between the average annual ROS (ROA or ROE) during the period of the year of the
event and one year after it and the period of three years before the controlling entrepreneur enters into politics. Tobin’s Q is measured by the sum
of total market value and total net liabilities divided by total assets. Leverage is the ratio of total liabilities over total assets. Size is the natural
logarithm of total assets. All variables are winsorized at top and bottom 5%. *** ,** and * denote significance for the difference between the
research sample and matching sample at 1%, 5%, and 10% respectively.
N
Growth in assets
Growth in sales
Growth in earnings
Change in ROS
Change in ROA
Change ROE
Tobin’s Q
Leverage
Size
73
73
73
73
73
73
73
73
73
Research Sample
Mean
Median
Std. Dev.
0.362***
0.413***
0.352**
-0.006***
-0.003*
0.050***
1.855***
0.461*
20.965
0.325***
0.378***
0.287***
-0.007*
-0.001*
-0.006**
1.617**
0.455**
20.993
36 0.30
0.40
10.92
0.10
0.04
0.25
0.873
0.167
0.735
Matching Sample
Mean
Median
Std. Dev.
0.158
0.233
-4.892
-0.074
-0.019
-0.019
1.550
0.508
21.027
-0.181
-0.22
(-0.278)
(-0.028)
(-0.014)
(-0.014)
1.373
0.516
21.023
0.41
0.57
22.15
0.21
0.07
0.35
0.489
0.168
0.661
Table 3 Political Participation and Operating Performance (Continued)
Panel B: Regression Analysis
This table presents the OLS regression results of the effect of political participation on
operating performance. The dependent variables are the change in different debt
financing structures and debt maturities. The independent variables include Political
Participation, which equals one if the firm is controlled by an entrepreneur that enters
into politics and zero otherwise; Tobin’s Q, measured as the sum of total market value
and total net liabilities divided by total assets; Leverage, measured as the ratio of total
liabilities over total assets; Size, measured as natural logarithm of total assets.
Industry dummy and year dummy are also included but not reported. All variables are
winsorized at top and bottom 5%. Robust t-statistics are given in parentheses. ***, **,
and * denote significance at the 1%, 5% and 10% level, respectively.
(1)
(2)
(3)
(4)
(5)
(6)
Growth in Growth in Growth in Change Change in Change
assets
sales
Earnings
in ROS
ROA
in ROE
Political
0.171***
0.164**
5.235**
0.067**
0.015*
0.128***
Participation
(3.73)
(2.53)
(2.08)
*
(1.83)
(3.08)
(2.68)
Tobin’s Q
0.125***
0.126**
3.538*
0.018
0.012*
0.027
(3.36)
(2.33)
(1.69)
(0.89)
(1.71)
(0.78)
Leverage
-0.169
0.248
22.628***
0.077
0.053**
0.212*
(-1.23)
(1.25)
(2.94)
(1.02)
(2.14)
(1.67)
Size
0.200*** 0.172***
-0.113
0.013
0.010
-0.026
(5.44)
(3.22)
(-0.05)
(0.64)
(1.43)
(-0.77)
Intercept
-4.159*** -3.705***
-19.524
-0.419
-0.268*
0.327
(-5.18)
(-3.18)
(-0.43)
(-0.94)
(-1.82)
(0.44)
Industry
Yes
Yes
Yes
Yes
Yes
Yes
Year
Yes
Yes
Yes
Yes
Yes
Yes
Observations
146
146
146
146
146
146
2
Adjusted R
0.254
0.129
0.068
0.037
0.047
0.065
37 Table 4 Political Participation and Changes in Debt Financing Structure and Debt Maturity
Panel A: Descriptive Statistics
This table presents the descriptive statistics of debt financing structure change and debt maturity change for both research and matching sample.
The research sample is composed of private firms controlled by politically active private entrepreneurs. The matching firm is the one with
similar size, measured as sales, in the same industry as that for firms obtaining political network. The Change in debt financing structure(or debt
maturity) are the difference between the average annual debt financing structure(or debt maturity) variables in the period of year and one year
after obtaining political network and the period of three years before obtaining political network. Debt financing structure is measured as total
debt divided by total assets, or total debt plus accounts payable divided by total assets, Debt Maturity is measured as long-term debt divided by
total debt, or long-term debt divided by total debt plus accounts payable. All variables are winsorized at top and bottom 5%. *** ,** and *
denote significance for the difference between the research sample and matching sample at 1%,5% and 10% respectively.
Change in
Total Debt/ Total Assets
Change in
(Total Debt + Accounts Payable) /
Total Assets
Change in
Long-Term Debt/ Total Debt
Change in
Long-Term Debt/
(Total Debt + Accounts Payable)
N
69
Research Sample
Mean
Median
Std. Dev.
0.037***
0.029***
0.077
69
0.038**
0.045***
0.095
0.002
-0.002
0.075
69
0.021
0.000
0.203
-0.010
0.000
0.186
69
0.022**
0.000
0.127
-0.022
0.000
0.113
38 Matching Sample
Mean
Median
Std. Dev.
-0.005
-0.014
0.078
Table 4 Political Participation and Changes in Debt Financing Structure and
Debt Maturity (Continued)
Panel B: Regression Analysis
This table presents the OLS regression results of the effect of political participation on
changes in debt financing structure and debt maturity. The dependent variables are
change in debt financing structure and debt maturity. The independent variables are:
Political Participation, which equals one for the firms controlled by entrepreneurs that
enter into politics and zero otherwise; Tobin’s Q, measured as the sum of total market
value and total net liabilities divided by total assets; Leverage, measured as the ratio
of total liabilities to total assets; Size, measured as the natural logarithm of total
assets; Profitably, measured as the ratio of earnings to total assets; and Collateral,
measured as the ratio of total net fixed assets to total assets. Industry and year
dummies are included but not reported. All variables are winsorized at top and bottom
5%. Robust t-statistics are given in parentheses. ***, **, and * denote significance at
the 1%, 5% and 10% level, respectively.
(1)
Change in
Total Debt/
Total Assets
Political
Participation
Tobin’s Q
Leverage
Size
Profitability
Collateral
Intercept
Industry
Year
Observations
Adjusted R2
0.0410***
(3.14)
0.020
(1.41)
-0.051
(-1.02)
0.033*
(2.57)
0.051
(0.23)
0.005
(0.08)
0.759***
(2.69)
Yes
Yes
138
0.210
(2)
Change in
(Total Debt +
Accounts Payable) /
Total Assets
0.032***
(2.71)
0.028*
(1.87)
-0.012
(-0.24)
0.035**
(2.59)
0.048
(0.21)
0.060
(0.94)
0.839***
(2.80)
Yes
Yes
138
0.232
39 (3)
Change in
Long TermDebt / Total
Assets
0.038
(0.93)
0.012
(0.31)
0.081
(0.59)
0.013
(0.40)
0.242
(0.40)
0.027
(0.17)
-0.304
( -0.39)
Yes
Yes
138
0.091
(4)
Change in
Long Term-Debt/
(Total Debt +
Accounts Payable)
0.043*
(1.71)
0.011
(0.46)
-0.024
(-0.29)
0.003
(0.13)
0.088
(0.23)
0.036
(0.35)
0.062
(0.13)
Yes
Yes
138
0.109
Table 5 Political Participation and Tax Burden Change
Panel A: Descriptive Statistics
This table reports the descriptive statistics of tax burden change for both the research and matching sample. The research sample is composed of
private firms controlled by politically active private entrepreneurs. A matching firm is one of similar size, measured as total sales, and in the
same industry as the corresponding firm controlled by an entrepreneur that enters into politics. The change in tax burden is the difference
between the average annual ETR (or ETR1/ETR2) in the period of year and one year after obtaining political network and the period of three
years before obtaining political network. ETR is defined as (tax expense-deferred tax expense)/EBIT, ETR1 is defined as tax expense/EBIT, and
ETR2 is defined as tax expense/total profit. Capital intensity is defined as fixed net assets/total assets. Inventory intensity is defined as
inventory/total assets. Profitability is defined as earnings/total assets. All variables are winsorized at top and bottom 5%. *** ,**, and * denote
significance for the difference between the research sample and matching sample at 1%, 5%, and 10%, respectively.
Change in ERT
Change in ERT1
Change ERT2
Capital intensity
Inventory intensity
Profitability
N
73
73
73
73
73
73
Research Sample
Mean
Median
Std. Dev.
0.001*
-0.003**
0.104
-0.028*
-0.023*
0.080
-0.033**
-0.028*
0.104
0.263
0.232
0.141
0.153
0.120
0.119
0.048
0.049
0.041
40 Mean
0.014
-0.013
0.007
0.256
0.174
0.017
Matching Sample
Median
Std. Dev.
0.028
0.121
-0.001
0.088
0.006
0.142
0.227
0.151
0.130
0.129
0.014
0.049
Table 5 Political Participation and Tax Burden Change (Continued)
Panel B: Regression Analysis
This table reports the OLS regression results of the effect of political participation
on tax burden change. The dependent variables are tax burden change, proxied by
the change in ETR, ETR1, and ETR2, respectively. The independent variables
include Political Participation, which equals one for the firms controlled by
entrepreneurs that enter into politics and zero otherwise; Tobin’s Q, measured as the
sum of total market valuation of equities and total net liabilities divided by total
assets; Leverage, measured as the ratio of total liabilities over total assets; Size,
measured as natural logarithm of total assets; Capital intensity, defined as fixed net
assets/total assets; Inventory intensity, defined as inventory/total assets; Profitability,
defined as earnings/total assets. Industry and year dummies are included but not
reported. All variables are winsorized at top and bottom 5%. *** ,**, and * denote
significance at the 1%, 5%, and 10%, respectively.
Political Participation
Tobin’s Q
Leverage
Size
Capital intensity
Inventory intensity
Profitability
Intercept
Industry
Year
Observations
Adjusted R2
(1)
Change in ERT
-0.008*
(1.68)
-0.021
(-0.65)
0.151
(1.31)
-0.038
(-1.38)
-0.032
(-0.24)
-0.114
(-0.70)
-0.610
(-1.44)
1.028
(0.95)
Yes
Yes
146
0.084
(2)
Change in ERT1
-0.011*
(1.91)
0.000
(0.78)
0.069
(1.00)
-0.010
(-0.59)
0.020
(0.25)
0.153
(1.58)
0.229
(0.93)
0.326
(0.90)
Yes
Yes
146
0.014
41 (3)
Change in ERT2
-0.035*
(-1.94)
0.042
(1.13)
0.416***
(3.10)
-0.002
(-1.32)
0.235
(1.52)
0.248
(1.30)
-0.210
(-0.44)
-0.073
(-0.10)
Yes
Yes
146
0.087
Table 6 Political Participation and M&A Transactions
This table presents descriptive statistics when entrepreneurial firms make M&As,
including data from both the research and matching sample. A matching firm is a
firm of similar size, measured as total sales, in the same industry as that of the
corresponding firm controlled by an entrepreneur that becomes politically active.
Panel A reports the characteristics of the entrepreneurial firms with the following
variables: Political Participation, a dummy variable that equals one if the M&A
transaction takes place during the year that the controlling entrepreneur enters into
politics or the year after, and 0 otherwise; Tobin’s Q, measured as the sum of total
market value and total net liabilities divided by total assets; Leverage, measured as
the ratio of total liabilities to total assets; and Size, measured as the natural
logarithm of total assets. Panel B reports the characteristics of the transactions.
Type of M&A is a dummy variable that is equal to 1 when entrepreneurial firms
purchase equities and 0 otherwise. M&A Size is the ratio of the transaction value to
the size of the buyer. Regulated Industry is equal to 1 if the target is in a regulated
industry and 0 otherwise. Panel C reports the effects of political participation on
regulated industry entry during M&As transactions by entrepreneurial firms. The
dependent variable is a regulated industry entry dummy that is equal to 1 if the
acquired target functions in a regulated industry and 0 otherwise. Industry and year
dummies are included but not reported. All variables are winsorized at top and
bottom 5%. Robust t-statistics are given in parentheses. A logistic regression is
applied and Wald Chi-Square statistics are given in parentheses. *** ,** ,and *
denote significance at the 1%, 5%, and 10% level, respectively.
Mean
Median
Std. Dev.
Min
Max
Panel A: Characteristics of Entrepreneurial Firms
Political Participation
0.386
0
Tobin’s Q
2.509
1.681
Leverage
0.526
0.514
Size
21.253
21.209
0.488
2.777
0.178
0.826
0
0.869
0.008
18.687
1
32.869
1.608
23.811
Panel B: Characteristics of M&A Transactions
Type of M&A
0.795
1
M&A Size
0.077
0.023
Regulated Industry
0.216
0
0.405
0.172
0.413
0
0
0
1
1.455
1
42 Table 6 Political Participation and M&A Transactions (Continued)
Panel C: Regression Results - Dependent Variable: Regulated Industry Entry
Political Participation
0.1873***
(9.806)
0.066
(1.360)
1.611*
(3.214)
0.551***
(6.852)
-1.3787***
(9.806)
Yes
Yes
268
12.440
Tobin’s Q
Leverage
Size
Intercept
Industry
Year
Observations
Likelihood Ratio
43 Figure 1 Average Monthly Cumulative Abnormal Returns (CARs)
This figure presents the cumulative abnormal returns (CARs) for the research
sample and the matching sample, respectively. The research sample is composed of
firms controlled by entrepreneurs that enter into politics and date 0 is equal to the
month when the entrepreneur becomes politically active. The matching sample is
comprised by firms that match the research sample firms based on size, measured as
total sales, and industry.
44