Master Thesis – Entrepreneurship and Innovation
Political Connection, State Ownership and Performance of Outbound
M&As – an empirical research in China
Supervisor: Tsvi Vinig
2nd Supervisor: Sun Zhe
Student: Chen Fenghuan
Student Number: 10826653
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Abstract
Being in the biggest emerging market through out the world, Chinese companies are going through a rapid internationalizing process. The cross-border mergers and acquisitions (M&As) have increased rapidly these years. As the personal networking tie, the political connection is a strong prediction for the performance of cross-border M&As. Accordingly, as the corporate property, the state ownership represent the government’s control toward the business activities in Chinese companies. Therefore, the effects of political connection and state ownership toward the performance of outbound M&As have been explored in our research. After analyzing 225 outbound M&As cases from 2006 to the second quarter of 2014, our empirical research shows that the political connection is negative connected to the performance of outbound M&As. Specifically, the CEO’s local government political connection shows significantly negative impact on the performance of outbound M&As, and the CEO’s local government political connection is positive related to state-ownership. We also tested the chairman’s central government and local government political connection as well as the central and local government political connection by both CEO and chairman, and their impacts shows impact on some of the indexes of performance of outbound M&As, but generally their effects are weaker than the CEO’s local government political connection.
1 1. Introduction ... 1 1.1 Problem definition ... 3 1.2 Academic relevance ... 3 1.3 Social relevance ... 4 1.4 Structure of thesis ... 5 2. Literature review ... 6 2.1 Political connection ... 6 2.2 Outbound M&A ... 8 2.3 State ownership ... 9
2.4 State ownership, political connection and outbound M&A ... 10
3. Concept Model ... 14
4. Hypothesis ... 14
4.1 Political connection and performance of outbound M&A ... 15
4.2 Political connection and state ownership ... 17
4.3 The mediating role of state ownership ... 19
5.Research design ... 22
5.1 Data overview ... 22
5.2 Variable selection ... 24
6. Analysis and Results ... 32
6.1 Descriptive analysis ... 32
6.2 Mediation tested using hierarchical regression analysis ... 49
6.3 Robustness Test ... 64
7.Discussion & conclusion ... 67
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7.2 Limitations and future research directions ... 70 References... 71
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1.Introduction
Under the background of booming economic growing in China, more and more Chinese companies expand overseas through outbound M&As. According to the annual report of M&As in Chinese market by Qingke research institution, the amount of outbound M&A has been through a drastic development from $12670 million in 2007 to $38495 million in 20131. During this period, the number of completed cross-border M&A has increased from 35 units in 2007 to 99 units in 2013. Among these outbound M&As, the acquirers mainly come from the traditional industries including energy and mineral, real estate and machine manufacturing. Moreover, the M&As from emerging industries such as biotechnology, clean technologies and Internet has increased rapidly.
Based on the existing research of outbound M&As, the factors such as corporate expansion (Luo & Tung, 2007), government encouragement as well as the policy and system deficiency (Chen et al., 2011) drives the companies to conduct outbound M&As. And the factors including R&D investment (Morck & Yeung, 1992), tax (Manzon, 1994), payment method (Loughran & Vijh, 1997) are related to the performance of outbound M&As. These researches are mainly focused on the formal factors or economic factors which affecting performance of outbound M&As. However, the informal factors are also highly related to the performance of outbound M&As. There are already some studies focusing on the effect of informal factors such as the cultural influence (Barney, 1986) to the performance of cross-border M&A. But the study concerning relationship between the informal institutional factors such as political connection and the performance of outbound M&A is still insufficient. It has
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See Qingke research center, “2013 Chinese M&A research annual report”, by Qingke research group, February, 28th, 2014.
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been found that political connection can help companies gain more business advantages such as tax benefits (Wu et al. 2012) and trade expansion (Lu, 2011). The politically connected companies have higher opportunities to obtain the government approval for outward foreign direct investment (OFDI) (Wang et al., 2012) and higher speed of approval for OFDI (Chen et al., 2011). Moreover, the Chinese companies who are politically connected have better access to the bank loan (Cull & Xu, 2005) and the government bailout (Faccio et al., 2006). Moreover, in developing countries, the formal institutional rules such as laws and regulations as well as the whole institutional quality are still defective. As a result, the informal institutional support substitutes the formal institutional support in the emerging economies such as China (Xin & Pearce, 1996). Thus, in Chinese companies, the informal institutional factors such as political connection may have stronger impact on the outbound M&As rather than the formal institutional factors.
Guanxi become a vital tool for Chinese companies to gain competences (Xin &
Pearce, 1996), which means that the political connection play an important role in the business field in China. Specifically, the political connection helps the companies gain quicker and easier approval for the investments and business activities; there are more financial support (Faccio et al., 2006) based on the networking between the employees at the companies and officers at the commercial banks. Moreover, the companies who follow the national policy such as “Go out” policy can also gain political benefits from the governments (Tan, 2013). The existing research has pointed out the influence of political connection under the less developed economies, but few research focuses on the mechanism of political connection to the investment activities of companies. As one of the biggest economy in the world, Chinese government using the strategies such as “Go Out” policy to encourage the firms to increase OFDI and thus improve the national global business impact. Based on the imperfect system of
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laws and regulations, the informal institutional support play an important role in the cross-border M&As. The processes of outbound M&A by Chinese companies are highly related with political connection.
1.1 Problem definition
The research is conducted to explore the mechanism of the political connection to the outcomes of outbound M&As in China. Thus, the research question can be defined as follows:
What is the influence of political connection on the outcomes of outbound M&As in China?
1.2 Academic relevance
Chinese firms and government struggle to overcome the “latecomer disadvantage” through outbound M&As (Luo & Tung, 2007), which has become an efficient tool to boost the global process of China. There are already research and theories about the political connection and outbound M&As respectively, but there are less studies and little attention focus on the link between political connection and outbound M&As. Considering the political elements have great influence in every aspect of China, this research has great value. This paper will contribute by making up the gap and providing the empirical evidence from China to test the function of political connection to the outbound M&As. Moreover, the research shows that the government, which provide formal institutional support to the companies, is one of the main driver to the OFDI in China (Wang et al., 2012), but the research about the
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influence of political connection, which act as an informal institutional support, to the outcomes of OFDI is still understudied. However, research shows that a large amount of outbound M&As by Chinese companies are not completed and have less chance to success (Zhang & Ebbers, 2010), so the factors that affect the process and outcomes such as performance and completion of outbound M&As become urgent and important. In this paper, I provide the overview to the outcomes of outbound M&As in China through the political angle of view, by providing theories and empirical evidence to examine the relationship between political connection and the outcomes of outbound M&As. Therefore I can provide the overview to the outcomes of outbound M&As in China through the political angle of view, distinguish the effect of political connection in the emerging markets such as China, and explore the insights of the internationalizing process of Chinese companies as well as their performance of outbound M&As during this process.
1.3 Social relevance
As a networking tie between person to person, the political connection influences the business in Chinese companies by the interaction between the employees at the companies and the officers at the governments or state authorities. On one hand, our research focus on the political connection and outbound M&As in China, which become the growing internationalizing investment activities among Chinese companies. The companies can gain more insights about the impact of political connection on the outbound M&As, therefore they can take more efficient overseas investment decisions. On the other hand, the Chinese governments can deal with the relationship with Chinese companies better, allocate the resources among the state-owned enterprises (SOEs) and private-owned enterprises (POEs) better, and help them to boost the internationalizing process as well as improve the performance.
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Overview the business and economy, China is going through a rapid developing process. Therefore, the Chinese governments should improve their management toward the business including the international investments such as outbound M&As. The companies’ investment decision-makings are quite complicated because these decision-makings are based on the coordination among Chinese companies and Chinese institutions including the authorities that manage law, finance or industrial regulations. Our research helps the governments to build a better system for Chinese companies to plan, implement and fulfill their investments. The Chinese governments can build a better system for Chinese companies to compete, create, and generate more wealth to the whole society. A better economy system helps the internationalizing process going smoothly and helps the outbound M&As healthily developed. The government’s resources that support the outbound M&A can be better allocated and the performance of outbound M&As can be improved.
Finally, governments can generate more healthy and transparent political environment for the Chinese companies. Our research provide an overview of the political connection and outbound M&As, the empirical results can help the Chinese companies gain more insights about political connection and outbound M&As, recognize the effects of political connection and thus help the Chinese companies find a better way to deal with the relationships with governments.
1.4 Structure of thesis
In this paper, first, the literature review will be provided to elaborate the political connection, outbound M&As and the relationships between both of them. Then, the
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hypothesis as well as the sub-hypothesis will be introduced and explained. After the hypothesis, the research methodology such as data collection, data measurement and data analysis will be identified. Later, the results of the analysis and the research findings will be discussed and concluded. Finally, the limitation of the research will be provided.
2. Literature review
2.1 Political connection
In China, the culture of guanxi is prevalent in the field of business. Guanxi is a kind of interpersonal connections that is driven by mutual interest and benefit (Yang, 1994). It is more about a social network in which people do favors for the other and keep the expectation that this person will repaid the favor in the future (Yang, 1994). It refers to the relationships among people that not only focus on the relationship among
1.Introduction
2.Literature Review 3. Hypothesis
4. Method & Analysis
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families or friends but also on the social connections (Yang, 1994) such as political connection.
The study by Kiong and Kee in 1998 shows that the western societies pay more attention on the system trusts while the Chinese society pay more attention on the personal trust. Building guanxi with the guests, suppliers or loan institutions is the first priority for Chinese businessman to obtain trust, while gain trust by formal connection with the institutions becomes the second priority (Kiong & Kee, 1998). The managers in Chinese companies can have guanxi with the government when these managers currently or formerly work for government or military. The political connection, which generated by guanxi, can incur the government intervention or support to the firm (Fan et al., 2007). Government intervention is the key element in a transitional economy in which government influence firms by give them norms, conducts and requirements (Oliver, 1991). Government can provide the company with more key resources and support when the managers in companies are political connected (Claessens et al., 2008). Therefore, these politically connected managers can help the firms gain plenty of privileges and convenience since they have the network with the government officers who have the authority and resources that related to the benefit of the company or the politically connected managers have the authority and resources themselves due to the current political position they have.
Based on the existing research abroad, political connection has been proved a factor, which influence the firm value, decision-making, and performance. The analysis toward the politically connected companies from S&P 500 shows politically connected board is positive related to abnormal stock return (Goldman et al., 2008). The research of Lativia firms from 1996 to 2006 shows that the politically connected
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managers or chairmen improve the firm value through gaining support from government (Dombrovsky, 2011). Politically connected firms tend to raise capital domestically instead of overseas because of the easier access to the financial resource from state owned banks (Leuz et al., 2006). However, some research shows that political connection can also has negative impact toward the companies. Through the cross-border research by Shleifer and his colleagues in 1994, governments might share the benefits that generated through political connection to obtain the political goals. Thus, the government has a grabbing hand (Frye et al., 1996) towards the companies, and negatively affects their value and performance.
In China, the government’s supervision and management toward the firms is still deficient due to the undeveloped economic system and rules. Therefore, the public officials have stronger authority and ability to involve in the activities of firms. Based on the resource-based view (Birger, 1984), on the one hand, political connection can help companies gain more extra resources both tangible and intangible from government such as more financial support, less approval restriction and corporate bailout (Faccio et al., 2006). On the other hand, some research shows the negative effect of political connection. For example, the research of 790 Chinese listed companies shows that the politically connected firms has poorer three-years Post-IPO performance including stock price, earnings growth, sales growth and change in return on sales than non-politically connected firms (Fan et al., 2007).
2.2 Outbound M&A
M&A can be defined as the companies gain competitive capabilities and competences by acquire another firm in developed economy (Mathews, 2002) or implement the
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OFDI to obtain the strategic assets and resources (Wesson, 2004). M&A can be considered as the main type of foreign direct investment. In China, many companies seek for competence by cross-border M&A, which make up their disadvantages in technology, management, patent development and branding.
According to resource-based theory, the resources and capabilities are the main determinants of competence of a firm (Barney, 1991). Thus, seeking for strategic assets has been regarded as the main driver of M&A (Anand & Singh, 1997). The “go global” strategy in China, which was announced in 2001, has been considered as the driver for Chinese companies to implement foreign direct investment. In order to follow the trend of globalization economy, Chinese government promote and encourage the Chinese firms to offset fall behind part by using overseas foreign direct investment (OFDI) and thus gain more advantages in global competition (Deng, 2004). Many Chinese firms use the cross-border M&A as a tool to implement overseas expansion strategy (Deng, 2009). The “going out” strategy has stimulated the fast growth of OFDI and help China to develop many priorities and to catch up with the well-developed global companies. Many Chinese companies use the OFDI and outbound M&A to narrow down the gap between themselves and the global leading companies and thus gain more competitive advantage in global market (Child & Rodrigues, 2005). In addition, some studies show that the OFDI could become a political tool, which is used to establish diplomatic relationship among countries and thus help China to maintain the international relation in the world (Jiang, 2009).
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The state ownership is one of the most important features in Chinese companies (Chen & Young, 2010). Chinese companies that implement the overseas investments have ownership types range from wholly SOE, to joint owned enterprise, to private enterprise. The role of state ownership on domestic governance and operation has been widely studied (Ding et al., 2007; Zou & Adams, 2008). However, the research concerning the role of state ownership in the internationalization process of Chinese companies is still understudied (Chen & Young, 2010). According to the recent empirical studies, the role of government on the M&A decision-makings has been examined (Luo et al., 2010; Peng, 2010). One of the channels that Chinese governments influence the Chinese companies is by Chinese formal authorities and institutions, which have significant impact on the firm’s investment decision-makings and behaviors (Hoskisson et al., 2000). Furthermore, state ownership is a channel that governments have actual impact on the corporate decision-makings. Most of Chinese public listed enterprises are formerly controlled by governments. The Chinese Communist Party (CCP) and State-owned Assets Supervision and Administration Commission of the State Council (SASAC) have vital influence toward the SOEs. According to the research by Shleifer and Vishny in 1994, state ownership affect the corporate decision-makings by the combination with political goals, which damage the corporate values greatly. Furthermore, The low efficiencies by SOEs are owed to the lack of soft budget constraints, managerial autonomy and the agency incentive problem (Groves et al., 1994). However, some researchers hold the opposite opinions. Tian and Estrin (2008) argue that the state ownership help enhancing the value of companies in emerging economies because it brings the benefits and superior treatment from the governments such as better allocation of resources.
2.4 State ownership, political connection and outbound M&A
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many aspects. For example, the European countries use the advanced economic system as the institutional support that consist of rule of law, protection towards intellectual property right, financial department, democracy and high regulation to boost the OFDI (Demekas, 2007). Compared to these European economies, the emerging economies such as China still in the situation with weak institutional system building (Khanna et al., 2005). Therefore, the informal institutional support such as the guanxi work as a substitution for this weakness (Xin & Pearce, 1996), which facilitates internationalization for the Chinese companies. Research shows that the state ownership can help companies obtain higher operating performance and long term stock performance in the M&As than the private ownership (Zhou et al., 2012). During the process of OFDI, Chinese investors could encounter many difficulties. Thus, the government support becomes an important resource during this period. Compared to the SOEs, the POEs need to be more cautious in the OFDI decision-making due to less support from government (Wei et al., 2014). Beside the advantage from ownership, companies can also get government networking tie through political connection. Specifically, as the corporate property, state ownership helps the SOEs improve the efficiency (Vining & Boardman, 1992). However, once the state ownership is lacked, the corporate property cannot help companies gain benefits by the corporate networking tie, so that the companies can only seek for the guanxi (Xin & Pearce, 1996) such as political connection to gain some benefits from
governments. As the personal networking resource, political connection helps the companies fulfill their investments in outbound M&As. Therefore, the companies that without corporate networking tie tend to seek resources from governments by corruption in order to build the guanxi (Xin & Pearce, 1996). Accordingly, corruption is more likely to emerge in the firms without political connection. These non-politically connected firms tend to bribe politicians and thus obtain benefits from
governments (Faccio, 2006). Political connection is common involved in the
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system and more restrictions toward OFDI.
In western developed countries, the OFDI is mainly driven by market behavior. However, in emerging markets such as China, the OFDI is also driven by government intervention and support (Tan, 2013). As a result, the government intervention and support generate and boost the coordination between Chinese companies and governments’ authorities (Tan, 2013). The OFDI can bring economic benefits for the home countries (Gammeltoft et al., 2010) by boosting the exports of the countries and increasing the job positions (Kalotay, 2004). The OFDI is related to the competitiveness of the home countries (Zhao et al., 2010), which become the motivation of government intervention and support for the OFDI. The existing research shows that in the emerging markets such as China, the government play an important role in the internationalization of firms by support their cross-border M&A (CBM&A) (Du & Boateng, 2014). Institutional support is an important element in Chinese OFDI, while the technological elements and advertising resources elements are less important (Wang et al., 2012).
Policy, commercial banks and Chinese agencies are the three major influencers toward the government intervention of Chinese OFDI. The policy of Chinese overseas investment experience the restriction period, encouragement period and simplifying procedure period (Tan, 2013). Along with the three periods, the regulations and policies has been published accordingly to influence the internationalization of China. For example, the “go global” policy, which published at 2001 in the 10th Five Year Plan, put the OFDI as the strategic method in the economic development of China. This policy encourages the Chinese firms to “go global” and thus boost the internationalization of China (Ramasamy et al., 2012). The commercial bank start to
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enter M&A businesses since 2008 and the financial resources such as loan need highly cooperation between Chinese government and companies (Tan, 2013). As the main shareholder of Chinese 120 SOEs, the state-owned assets supervision and administration commission (SASAC) supervise the Chinese SOEs including the punishment, rewards and performance review (Tan, 2013). Chinese development bank is the major bank that lends money to the cross-border investors (Downs & Erica, 2011). National development and reform commission (NDFC) is the main approval authority for Chinese overseas investments. They consider approval mainly by two aspects: First, the investment task needs to fit the Chinese development needs. For example, the target companies have the strategic technologies or human resources or international brands that the Chinese companies and industries need to obtain to further developed themselves. Second, the investment task needs to fit the China’s political interest. For example, Chinese governments want to build the diplomatic relations with some countries and therefore boost the international collaborations with these countries, and one of the typical international collaboration is outbound M&As. In sum, Chinese governments influence the OFDI through publishing policies, providing financial resources and managing the institutions that control the approval of the companies’ investments tasks. Therefore, the government is an important role behind the internationalization of companies (Peng et al., 2008).
The interactions between Chinese government and Chinese firms are quite strong (Wei et al., 2014). Therefore, the politically connected firms can help the companies gain quicker contract approval, financial support (Downs & Erica, 2011), bailout (Tan, 2013) and loans (Faccio et al., 2006) from government and thus influence the performance and completion of the outward M&As (Peng et al., 2008). Like other governments in the emerging economies, the Chinese governments exploit the regulations, restrictions to safeguard the state assets, benefit the national interests and
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to prevent capital fights with the foreign countries (Deng, 2004; Luo et al., 2010). Specifically, these regulations and restrictions are controlled by the system in which the governments are responsible for the approval toward the outward FDI (Deng, 2004; Luo et al., 2010). Furthermore, Chinese governments use the restrictions on the foreign exchange to prevent the potential capital fights (Cui & Jiang, 2010). The OFDI projects can be rejected or delayed if they are not adhere with the governments interests or foreign exchange policies, thus these regulations also generate pressures which constrains the OFDI decision-makings and choices by firms (Cui & Jiang, 2010). The main objective of the system is to control the capital of outward FDI and thus direct the outward FDI activities such as cross-border M&As. As a result, Chinese companies put effort to make the investments decision-makings adhere to the strategies of governments’ international investments. For instance, the governments use the outward FDI to obtain foreign natural resources and advanced technologies.
3.Concept Model
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4.1 Political connection and performance of outbound M&A
According to Yang in 1994, guanxi can be determined as a relationship between persons, forces or objects. In this relationship, the two persons that have guanxi can ask for the favor from each other and hold the expectation that he or she will return this favor back in the future (Yang, 1994). In China, guanxi substitutes the formal institutional support and thus bring many benefits to companies (Xin & Pearce, 1996). Political connection (Faccio, 2006), as one kind of guanxi (Yang, 1994) between managers and governments, also bring benefits to the companies (Xin & Pearce, 1996). Based on the resource-based theory (Birger, 1984), political connection can provide companies with informal institutional support such as quicker contract approval, financial support (Downs & Erica, 2011), bailout (Tan, 2013) and loans (Faccio et al., 2006). Thus provide the companies with many advantages and improve their performance. However, in our research, we hold opposite opinion. Political connection cannot only bring benefits to companies, but they also do harm to the firm value in many situations. Therefore, the dark side of the political connection is examined in our research.
The negative effects come from many aspects and based from the reasons show as follows. Firstly, although there is better resource distribution to the companies, which have political connection, these companies may waste the resources due to the easy access to them. Specifically, the resource is not unlimited. But the easily access to the resources especially the easy access to the financial resources (Downs & Erica, 2011) make the companies implement many inefficient investments. According to the hubris theory (Hayward et al., 2006), the managers with greater confidence tend to devote more venture resources and over use the resources, thus increase the risk of investments, which make this investment with higher probability to become a fail
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(Hayward et al., 2006). The political connected CEO and chairman has better networking resource, it can be regarded as the “better than average” effect, which is one kind of overconfidence (Larwood & Whittaker, 1977). This characteristic comes from the CEO or chairman themselves but bring damage to the companies in which they have investment decision-makings. The political connection help the companies gain more resources and therefore the CEOs may overestimate the investment ability of their companies. Overconfident CEO overestimates the success probability of M&As and make decisions for the M&A investments, which may damage the firm value (Malmendie & Tate, 2005). The low efficiency of M&A investment has been examined in many researches. For example, the government’s easy approval and strong support (Downs & Erica, 2011) toward the M&A decisions can prevent the M&A deals become hostile, which means the transition cost goes higher and the firm value can be destroyed.
Secondly, politicians encourage the political connected companies to hire more employees and thus help the governments reduce the unemployment rate (Bennedsen, et al., 2006). The research by Boycko and his colleagues in 1996 find that in order to satisfied the political objectives of the politicians, the public enterprises employ excess labors. According to the research by Bertrand and his colleagues in 2006, the human resource costs in political connected companies are too high. The political connected CEO creates more job opportunities in the areas that have higher political competition. The companies also have higher employment rate and more new factory (Bertrand et al., 2006). Therefore, although the political connections bring benefits to the companies, the companies need to return this favor to the government (Yang, 1994). The political connected companies also need to pay the debt for the benefits gained from political connection, and this debt may neutralize the benefits they have gained (Bertrand et al., 2006).
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Thirdly, according to many previous studies over the world, the political connections can the damage the firm value. The performance of political connected companies is lower than their competitors (Shleifer & Vishny, 1994). The indexes such as capital return (Bertrand et al., 2004), financial performance (Faccio et al, 2006), the stock return, operational revenue increasing rate and profitability (Fan et al, 2007) and other accounting performance (Faccio, 2006) in the political connected companies are significantly lower than the companies that have no political connection. The political connected companies are usually under too much low efficiency investment that sourced from political objectives. The research by Hung and his colleagues in 2008 finds that, many Chinese companies listed in overseas stock markets based on the political need of the governments instead of the need for global expansion. Based on the arguments above, we proposed that the political connection is negatively related to the performance of outbound M&As.
Hypothesis1:
Political connection is negatively related to the performance of outbound M&As.
4.2 Political connection and state ownership
According to the research by Krueger in 1990, the SOEs have the pressure to hire the politically connected people instead of the candidates who are better qualified to perform the job. The research by Yang in 1994 defined guanxi as a relationship in which two persons can ask for the favor from each other and hold the expectation that he or she will return this favor back in the future (Yang, 1994). The political connected candidates who target on the job positions in SOEs can ask favor from the
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politicians or government officers to help them gain this job. In China, the culture of guanxi is very prevalent in the field of business as well as the job market, thus the
political connection can help the candidate obtain the job based on the guanxi (Yang, 1994).
Compared to the POEs, the CEOs in SOEs has higher pressure to obey the governments willingness to recruit a specific candidates who asked the favor from governments officers to obtain a job position in SOEs. In China, the CEOs in SOEs are much more dependent and rely on the governments compared to the CEOs in POEs due to the government hold the power to decide their promotion and has the authority to evaluate them (Fan et al, 2007), which means the governments have huge power on the career path and development of CEOs in SOEs. Therefore, these CEOs have motivation to follow governments demand because they don’t want to lose their positions, and these demands includes recruiting the political connected candidates who ask a favor from the governments.
On the other hand, the political connected candidates obtain the job position in the SOEs, so that the governments have given a favor to these employees. Accordingly, the governments will hold the expectation that he or she will return this favor back in the future (Yang, 1994), thus the government officers can also gain benefits from these political connected employee because they are potentially become the person that help them accomplish the political goals in the future. Therefore, the governments also have motivation to help these political connected candidates to obtain the job position in SOEs.
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Moreover, according to the definition of political connection (Faccio, 2006), the political connected managers are the managers who currently or previously work for governments. However, the managers with no political connection can also gain this networking tie during their careers in SOEs. Specifically, as the main shareholder, government supervise, monitor and manage the SOEs. Thus, at the same time, they also want to consolidate their power of control toward these SOEs (Li et al, 2011). In order to achieve this power consolidation, one of the methods is recruit the SOE managers into the government institutions such as CCP and Chinese People’s Political Consultative Conference (CPPCC) (Li et al., 2011). And thus build stronger networking tie between the government and SOEs. Therefore, the SOE managers have more chance to obtain political connection compared to POEs (Li et al., 2011). In addition, the research by Dickson in 2003 finds that the Chinese government relocated the retired government officers into the existing SOEs, sometimes the government event build new SOEs to provide the job positions for these retired officials (Dickson, 2003), and this can apparently increase the political connected employee in the SOEs. Based on the arguments above, we propose that the political connection is positively related to state ownership.
Hypothesis2:
Political connection is positively related to the state-ownership.
4.3 The mediating role of state ownership
State-ownership is defined as the ownership ratio, which is the ratio of state-shares divide the total outstanding shares (Tao et al., 2009). Therefore, SOEs are the assets of the governments. The governments are the main shareholder of SOEs and they affect
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SOEs’ FDI through external institutional intervention (Cui et al., 2012). Specifically, the SOEs usually help the governments to achieve the political goals, so that in overseas investments, the SOEs are not only perceived as the business entities, but also be regarded as the political actor (Globerman & Shapiro, 2009).
The political connected SOEs managers have the motivation to help SOE achieve these political goals because their promotion are mainly decided by the governments, that means the SOE CEOs have the motivation to adhere government goals in order to maintain their current positions or get promoted (Fan et al., 2007). For the SOEs managers with political connection, they have guanxi with the governments and therefore they are willing to do favor to them (Yang, 1994) since the government might also do a favor for their career path and development in the future (Fan et al., 2007). For the SOEs managers without political connection, they also have more chances to gain this political guanxi (Yang, 1994) during their work in SOEs. One of the reasons are that the government prefers to have interaction with the SOEs managers instead of the non-SOEs managers because the government regard the SOEs as their pillar who have the common interests with them (Li et al., 2010). The other reason is that the SOEs, whose shareholder is the government, have natural government networking tie (Cui et al., 2012). SOEs provide a channel to help managers generate more political connection. Specifically, the SOE become a government tie channel (Li et al., 2010) for the employees because it generate a place and provide space for managers and government officials to get together and thus have interaction with each other (Li et al., 2010).
Furthermore, many researches has examined that the state-ownership reduce the efficiency of the SOEs. The study by Hovey and his colleagues in 2003 find that the
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shareholding of the legal persons is positively related to the firm value while the shareholding of the state are not. Government interventions are the keys that reduce the efficiency of SOEs (Cai, 2002). By comparing the earning manage among different ownership especially the state-ownership and private-ownership, Ding and his colleagues in 2007 find that the listed companies which is private owned have higher motivation to maximize their accounting performance compared to the listed companies which is state-owned.
Therefore, the state-ownership becomes the link and bridge between political connection and the performance of outbound M&As. The state-ownership acts like a platform (Li et al., 2010), which allows the personal networking tie such as political connection to be generated or show its effect. In our research, we propose that the political connection is negatively affecting the performance of outbound M&As. And the political connection damages the firm value through the state-ownership.
On one hand, the CEOs in SOEs have the motivation to help SOEs achieve the political goals because that the CEO’s promotion and evaluation are controlled by the governments (Fan et al., 2007). SOEs, as a agency of government, need to consistent with the political objectives (Globerman & Shapiro, 2009) and help the governments to achieve the political goals, therefore the CEOs in the SOEs are more likely to implement the investment which meet the political goals but actually damage the firm value because they achieve the political goal in the expense of sacrifice the benefits of the other stockholders (Hovey et al., 2003).
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al., 2010). As a result, more political connection has been generated and maintained. However, political connection, as the guanxi (Yang, 1994) between managers the governments, makes the managers to do favor to governments and help them achieve the political goals (Fan et al., 2007). For example, the CEOs with political connection have higher probability of donation, which satisfied the need of governments (Jia & Zhang, 2013), and the SOEs, as the agency of government, is the business entities that implement these tasks and help governments achieve these political goals (Shleifer, 1998). Based on the arguments above, we propose that the state-ownership mediate the relationship between political connection and performance of outbound M&As.
Hypothesis3:
State-ownership mediate the relationship between political connection and the
performance of outbound M&As
5.Research design
5.1 Data overview
The information about the outbound M&A deals including acquirers, targets and years are sourced from the Zephyr database. Based on the data of M&A deals and events from Zephyr, further data about M&A outcomes and other details are sourced from the Chinese Stock Market Research (CSMAR) database, which provide abundant information of outbound M&As such as the name of target, country of target, deal value, deal type, announced date, status and industry etc. Compared to other database such as Data-stream and Thomason One, CSMAR database integrate the Chinese
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national conditions and has more up to date information as well as less missing data.
Based on the CSMAR database, the M&As performance data is extracted from the section of the financial index of Chinese listed companies database. The data of political connection is extracted from the section of listed companies’ top managers characteristics database. The CSMAR database also contain the basis information of companies include state ownership, employee numbers, companies established year, leverage etc.
The paper target on the Chinese listed companies both from Shanghai Stock Exchange and Shenzhen Stock Exchange, and select the outbound M&As that announced from 2006 to the first quarter of 2014. The data of performance are sourced from the quarterly report of these listed companies. In order to reflect the essence and improve the accuracy and objectivity, the research adjusts the samples by the following rules. After the exclusion of the cases meet the following rules, there is finally 225 M&A cases that are selected.
A. M&As by financial companies will be eliminated
B. ST companies will be eliminated
C. Companies listed in B stock market and H stock market will be eliminated, due to the use of different currencies.
D. If there are two or more than two outbound M&As in one year, only select the firstly announced M&A among them.
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separate these M&As events as individual M&A event into sample.
5.2 Variable selection
5.2.1 dependent variable
The research uses the data from quarterly reports of Chinese listed companies to measure the long-term performance. Accounting analyzing method is one kind of financial method that uses several accounting variables to build the performance measurement system and thus to judge the performance. These accounting variables are sourced from the quarterly reports, which is relatively objective and fair. The performance of outbound M&As will not show up immediately after the announcement date. It needs a relative long time to act for the effects of outbound M&A. Thus, the quarterly reports on year after the M&A announcement can represent the long-term performance. Since our sample ranges from the first quarter of 2006 to the first quarter of 2014, our data that measure the long-term performance are sourced from the quarterly report from the first quarter of 2007 to the first quarter of 2015. For example, if the M&A events is announced in first quarter, we use the data from the first quarter of the second year to measure the long term performance. Correspondingly, if the M&A events is announced in second, third or fourth quarter, we use the accounting data from the second quarterly report, third quarterly report and fourth quarterly report, respectively, in the second year after M&A announcement to measure the long term performance.
The research selects several accounting variables to measure the long-term performance. According to the research by Williams in 1974, there will never be unlimited resources that used for companies’ investments and projects. The
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cost-benefits ratio needs to be considered when measures the performance of a project. Control the cost-benefit ratio can help companies improve the risk management and utilize the budget constraint (Straub & Spackova, 2015). Moreover, it helps to make sure the discretion is not abused (Posner & Weyl, 2013). The benefit-cost analysis has been widely applied in the research of environment, health as well as economics (Whitehead, 2012). According to the research by Williams in 1974, cost benefit analysis proposed that the values generated when benefits outweigh the cost. Specifically, the outcomes of the projects can be measured, and the costs and the benefits can be measured against each other (Williams, 1974). Therefore, in our research, we measure the performance both by the benefits and by the costs. On one hand, we use profits and revenue indexes to measure the performance in a positively way. On the other hand, we use cost index that measure the performance in a opposite way, because the cost is the index that against the benefits (Williams, 1974). Finally, there are two aspects that can be used to measure the long-term performance, including the benefits and costs one year after the M&A announcement.
In order to test the performance more efficiently and accurately, we use more than one index to measure the performance. Specifically, we use five indexes to measure benefits and two indexes to measure the costs. The five indexes that measure the benefit including long-term return on capital (LROC), return on invested capital (ROIC), return on asset (ROA), current assets net profit margin (CANPM) and operating profit margin (OPM). Thus, there are totally seven items to measure the long-term performance. LROC is used for measuring the long-term performance by many researches (Schikowsky et al., 2010; Jorion, 1999). ROIC is called the return on capital or the return on invested capital, it is used to measure the return of an investment (Damodaran, 2007), and its definition shows in following table. Moreover, the research by Dehning and Stratopoulos (2000) uses ROA, OPM and net profit
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margin to measure the profitability and performance of the investments. ROA is the earnings before taxes, interest, amortization and depreciation (Grinstein & Hribar, 2004), in the M&As research, it is very widely to use ROA to measure the performance (Hoskisson et al., 1991; Weber, 1996). The companies’ future growth and profitability can be measured by CAMPM (Ohlson, 1995). CANPM is usually used to predict the future performance and future profitability (Fairfield & Yohn, 2001). Finally, OPM calculated as the income divided by net sales, it helps to measure the income from operating activities per unit of sales and reflect the profitability of an investment (Dehning & Stratopoulos, 2000).
On the other hand, we use two indexes to measure the cost, including total operating cost ratio TTM (TOCRTTM), and financing expense ratio TTM (FARTTM). Operating costs ratio and financing expense ratio can be used to measure the cost performance (Cannon & Homburg, 2001). The cost is reduced and thus enhances the performance (Williamson, 2008). The project can be more cost effectively and perform better (Yeung et al., 2013). In addition, we define the time frame of total operating cost ratio and financing expense ratio by trailing twelve months (TTM) to make sure they measure the cost performance (Cannon & Homburg, 2001) in a long term range.
The details of these indexes and their equations show as table 1:
table 1
Performance measured by normal indexes (revenues & profits)
Long-term return on capital (LROC) income before tax fiancial expense
long term capital +
−
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liabilities + notes payable + short-term loans + long-term liability within one year)
Return on assets (ROA)
assets total
profits net
Current assets net profit margin (CANPM) net profits
average balance of circulating funds
Operating Profit Margin (OPM) operating profit
operating revenue
Performance measured by reverse indexes (costs)
total operating cost rate TTM (TOCRTTM) cos [ ]
[ ]
total operating ts TTM gross revenue TTM
Financial expense ratio TTM (FARTTM) exp [ ]
[ ]
financial ense TTM operating revenue TTM
5.2.2 Mediating variable
The purpose of our research is to examine the effect of state ownership toward the relationship between political connection and performance of outbound M&As. Therefore, the different effects between state ownership and private ownership is explored in our study. SOEs has closer ties with the governments, therefore, they can better access to the government resources such as finance support due to the central and local authorities controlled most of the resources. In A-shares market, the state shares are held by local government, central government or solely SOEs (Xu & Wang, 1999).
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The state-ownership is not fixed, although it cannot be publicly traded, it could be transferred to the domestic institutions when approved by the China’s Securities Regulatory Commission (Xu & Wang, 1999). Therefore, we use the state ownership that up to date in the M&As announced year to measure this variable. Moreover, referring to Tao and his colleagues research in 2009, the state ownership is defined as the state ratio, which is the ratio of state-shares divide the total outstanding shares (Tao et al., 2009). Thus, the equation of state ownership shows as follow:
State ownership = stocks total stocks owned state− 5.2.3 Independent variable
Faccio and Larry in 2002 supposed that a company is politically connected when one or more than one of the chairman, presidents, vice-presidents secretary and CEO of the company was politically connected. A politically connected manager may be a large shareholder with more than 10 percent of the shareholder votes (Faccio, 2006) or a top officer who is formerly or currently the head of the states, parliament members or be in a close relationship with a tip officer (Faccio, 2006). In China, the company with political connection usually means that the CEO is formerly or currently serve for government, including both central and local government, or serve for military (Fan et al., 2007). The top manager in Chinese firms is supposed to be the CEO (Fan et al., 2007) while many researchers supposed that the chairman should be the top manager in Chinese firms (Firth et al., 2006).
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Nowadays, there are two major methods to measure the political connection. One is that the CEO or the chairman is formerly or currently the government officer, deputy of the national people’s congress (NPC) or member of political consultative committee (PCC). The other one is that the company has involved in the government donation or public interest activities and thus gains the recognition by government. The first method is more valid and widely used in China (Chan et al, 2012; Wu et al., 2012; Zhou et al., 2012).
For the first method, there are mainly four type of measurement, including dummy variable measurement (Faccio, 2006), assignment measurement (Du et al., 2010) and ratio measurement respectively (Fan et al., 2007). The assignment measurement regards the value of political connection as the level of political position. For example, the officer in national level, province level, city level and district level is assigned different value from “4” to “1” and no political connection assigned the value of “0” (Du et al., 2010). Besides, ratio measurement means that the percentage of share owned by the CEO or chairman who is political connected (Fan et al., 2007).
Based on the prior research, the dummy variables play a vital role in the measurement of political connection. However, the existing research has limited understanding toward the variant effects from different levels of political connection such as the state level political connection, province level and city level of political connection. According to the research by Wang and his colleagues in 2012, the influence of institutional pressures on Chinese companies differs among different levels of governments. The local effect of government and central government in corporate internationalization decision-making differs between each other. Therefore, our research divides the variance level of government political connection to measure the
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independent variable. Referred to the research by Faccio in 2006, we also defined the political connection as the CEO or the chairman is formerly or currently the government official, deputy of the national people’s congress (NPC) or member of political consultative committee (PCC). The variable of political connection use continuous value. It has been categorized into the political connection of CEO, political connection of chairman and political connection of the whole top management team. The details of measurements are shown in the following table.
Table 2
Calculation Political connection with central government
Political connection with local government
CEO Number =The number of central
government connected CEO
=The number of local government connected CEO Percentage = The number of central
government connected CEO/ the total number of CEO
= The number of local government connected CEO/ the total number of CEO
Chairman Number =The number of central government connected chairman
=The number of local government connected chairman Percentage = The number of central
government connected chairman/ the total number of chairman
= The number of local government connected chairman/ the total number of chairman
Both Number =The number of central
government connected CEO and chairman
=The number of local government connected CEO and chairman Percentage = The number of central
government connected CEO and chairman/ the total number of CEO and chairman
= The number of local government connected CEO and chairman/ the total number of CEO and chairman
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In order to analyze the influence of political connection to the outcomes of outbound M&As and improve the accuracy, the research control some variables which might affect the outcomes of these firms at the same time.
First, the paper uses the total asset to control the firm size. We select the data of total asset in the quarterly report, in which the M&A event is announced. Second, the experience of the firms affect the performance so that the firm age, which is the number of years since firm, established is controlled. In addition, the companies go public also has great impact in the organization decision-making and information sharing, therefore, the number of years since firm went listed is also controlled in our model. Third, the firm with higher leverage is easier to get the long-term loan (Dewally & Shao, 2013), which is positively related to the long-term performance of the firm. Thus, the leverage of the firm, the total debt divides by the total asset (Nance et al., 1993) is controlled. In addition, we use the leverage in the same quarterly report, which the M&A investment decision is announced. Fourth, considering cross-industries M&As in which the differences between industries may affect the performance. The industries are controlled as dummy variable in our model. Specifically, as the industries are range from public utilities industry, real estate industry, multiple industry, manufacture industry to commercial industry (Laamanen, 2007). There are totally six industrial dummy variables that are generated to control the model. Fifth, consider different macro-economic situation, the M&A announced year is also controlled as year dummy variable. Finally, considering the target countries in cross-border M&As have different situation of economic system and government intervention, whether the target countries are developing countries or developed countries may affect the outcomes of M&As, therefore, the target country is under controlled as dummy variable (Buch & DeLong, 2004). If the target countries are developing countries, the dummy variable take the value of “1”, otherwise it take
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the value of “0”.
6. Analysis and Results
6.1 Descriptive analysis
In order to have a general cognition toward the cross-border M&A events, the industry distribution, announced year, target countries is analyzed by the descriptive analysis. We have 225 samples in total, which cover 5 industries in 41 target counties from 2006 to the first quarter of 2014. Through this part, we can understand more about the sample. The results has be shown by the tables and figures as follows.
6.1.1 Target country
From Table 3 and Figure 1, we can figure out that near half of the outbound M&A cases are target in America or HK, which is 20.4% and 20.9% respectively. Besides these two targets, Germany is also popular as the M&A targets of Chinese listed companies, which is 11.6%. For the rest of target countries, the distribution is quite decentralized. There are 22 countries that only been the target once during 2006 to 2014, most of them are developing countries. Moreover, Table 4 shows that distribution of developing countries and developed countries, we can find that most of the outbound M&A cases are target on the developed countries, which is 92.4%. And the developing countries only occupied 7.6%, which is far below the developed countries.
Table 3 target countries
Frequency Percent Valid Percent Cumulative Percent
33 Australia 4 1.8 1.8 22.2 Austria 1 .4 .4 22.7 Belgium 1 .4 .4 23.1 Bolivia 1 .4 .4 23.6 Cambodia 1 .4 .4 24.0 Canada 13 5.8 5.8 29.8 Cayman 1 .4 .4 30.2 Chile 1 .4 .4 30.7 Congo 1 .4 .4 31.1 Czech 1 .4 .4 31.6 Denmark 4 1.8 1.8 33.3 England 4 1.8 1.8 35.1 Europe 2 .9 .9 36.0 Finland 1 .4 .4 36.4 France 3 1.3 1.3 37.8 Gabon 1 .4 .4 38.2 Germany 26 11.6 11.6 49.8 HK 47 20.9 20.9 70.7 Hungary 1 .4 .4 71.1 India 2 .9 .9 72.0 Italy 4 1.8 1.8 73.8 Japan 13 5.8 5.8 79.6 Kazakhstan 1 .4 .4 80.0 Kirghizia 1 .4 .4 80.4 Korea 1 .4 .4 80.9 Laos 1 .4 .4 81.3 Luxemburg 1 .4 .4 81.8 Netherlands 8 3.6 3.6 85.3 New Zealand 1 .4 .4 85.8 Poland 1 .4 .4 86.2 Singapore 10 4.4 4.4 90.7 South Africa 1 .4 .4 91.1 Spain 1 .4 .4 91.6 Sudan 1 .4 .4 92.0 Sweden 4 1.8 1.8 93.8 Switzerland 3 1.3 1.3 95.1 Thailand 2 .9 .9 96.0 Thailand 2 .9 .9 96.9 Turkmenistan 1 .4 .4 97.3 UK 6 2.7 2.7 100.0
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Total 225 100.0 100.0
Figure 1
Table 4 target countries developing situation
Frequency Percent Valid Percent Cumulative Percent
Developed 208 92.4 92.4 92.4
Developing 17 7.6 7.6 100.0
Total 225 100.0 100.0
6.1.2 industry
The 225 outbound M&A events cover 5 industries, including public industry, real estate industry, multiple industry, manufacture industry and commercial industry. From Figure 2 and Table 5, we can find that the company whose industry is located in the manufacture industry is the highest one, which is 76.4%. However, the companies
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whose industry is located on real estate industry is the lowest, which only 2.2%. Besides, the public industry, integration industry and commercial industry make up for 13.8%, 3.1% and 4.4% respectively.
Figure 2
Table 5 industry
Frequency Percent Valid Percent Cumulative Percent Public 31 13.8 13.8 13.8 Real estate 5 2.2 2.2 16.0 Integration 7 3.1 3.1 19.1 Manufacture 172 76.4 76.4 95.6 Commercial 10 4.4 4.4 100.0 Total 225 100.0 100.0
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Our research is target on the outbound M&A events that covers 9 years, which is from 2006 to 2014. Through Figure 3 and Table 6, we can find that there are only 5 M&A outbound M&A events in China in 2006. At that time, the cross-border M&As is not so popular. However, after 2006, the outbound M&As is growing rapidly from 18 cases in 2007 to 58 cases in 2012, which has increased more than 3 times based on the events in 2007. After 2012, the outbound M&As is decreased to 33 events in 2013.
Table 6 M&A event year
Frequency Percent Valid Percent Cumulative Percent 2006 5 2.2 2.2 2.2 2007 18 8.0 8.0 10.2 2008 11 4.9 4.9 15.1 2009 25 11.1 11.1 26.2 2010 23 10.2 10.2 36.4 2011 43 19.1 19.1 55.6 2012 58 25.8 25.8 81.3 2013 33 14.7 14.7 96.0 2014 (First quarter) 9 4.0 4.0 100.0 Total 225 100.0 100.0
37 Figure 3
6.1.4 Political connection
1.
Table 7 shows the distribution of the percentage of local government connected CEO. Our sample contains 225 observations in total. The results show that most of the companies (72.9%) do not have CEO with local government connection. The maximum percentage is 50%, which means that half CEOs in the firm have local government connection in our sample. Only one firm in our sample reaches this number. The table also shows that most of the firms have a percentage between 0% and 25%. No more than 3% of the firms have a number of higher than 25% of local government connected CEOs in all CEOs.
Table 7 percentage of local government connected CEO
Frequency Percent Valid Percent Cumulative Percent
.00 164 72.9 72.9 72.9
38 .08 7 3.1 3.1 76.9 .09 1 .4 .4 77.3 .10 8 3.6 .4 80.9 .11 7 3.1 3.1 84.0 .13 2 .9 .9 84.9 .14 5 2.2 2.2 87.1 .17 10 4.4 4.4 91.6 .20 6 2.7 2.7 94.2 .22 2 .9 .9 95.1 .25 5 2.2 2.2 97.3 .29 2 .9 .9 98.2 .38 1 .4 .4 98.7 .40 2 .9 .9 99.6 .50 1 .4 .4 100.0 Total 225 100.0 100.0 2.
Table 8 shows the distribution of the percentage of central government connected CEO. The results show that not more than 10% of the firms have central government connected CEO. This number is lower than the number of the percentage of local government connected CEO. This might indicates that central government connection is harder to obtain. The maximum percentage of the central government connection CEO is also 50%. However, there are 3 companies have 50% of CEO with central government connection while the fourth highest percentage is only 29%. We expect that these three companies are control by Chinese central government.
Table 8 percentage of central government connected CEO
Frequency Percent Valid Percent Cumulative Percent
.00 203 90.2 90.2 90.2 .05 2 .9 .9 91.1 .08 1 .4 .4 91.6 .10 2 .9 .9 92.4 .11 4 1.8 1.8 94.2 .14 2 .9 .9 95.1
39 .17 3 1.3 1.3 96.4 .20 2 .9 .9 97.3 .22 2 .9 .9 98.2 .29 1 .4 .4 98.7 .50 3 1.3 1.3 100.0 Total 225 100.0 100.0 3.
This is the table of the percentage distribution of central government connected chairman. Consistent with the results of the percentage of local government connected chairmen, near half of the companies (48%) have central government connected chairmen. 40% of firms have a percentage of local government connected chairmen between 0% and 20%. Chairmen’s local and central government connection show a very similar distribution pattern. This might indicates that these two government connections of chairmen might have some relationship. On the other hand, we find that the government connection of chairmen is higher than that of CEO in average. We expect that in general, chairmen are more likely to obtain government connection than CEO. Moreover, we also expect that government connection of chairmen might be more important for firm performance than that of CEO.
Table 9 percentage of central government connected chairman
Frequency Percent Valid Percent Cumulative Percent
.00 117 52.0 52.0 52.0 .05 1 .4 .4 52.4 .07 12 5.3 7.5 57.8 .08 5 2.2 2.2 60.0 .09 13 5.8 5.8 65.8 .10 6 2.7 2.7 68.4 .11 28 12.4 12.4 80.9 .13 6 2.7 2.7 83.6 .14 8 3.6 3.6 87.1 .15 1 .4 .4 87.6 .17 4 1.8 1.8 89.3 .18 5 2.2 2.2 91.6
40 .20 1 .4 .4 92.0 .21 1 .4 .4 92.4 .22 4 1.8 1.8 94.2 .25 3 1.3 1.3 95.6 .30 1 .4 .4 96.0 .33 2 .9 .9 96.9 .38 2 .9 .9 97.8 .44 4 1.8 1.8 99.6 .57 1 .4 .4 100.0 Total 225 100.0 100.0 4.
This is the table of the percentage distribution of local government connected chairman. Inconsistent with the government connection percentage of CEO, more than half of the firms have local connection chairmen (57.3%). The percentage is distributed more equally between 0% and 50% than the previous results. About 40% of firms have a percentage of local government connected chairmen between 0% and 20%. Less than 20% of the firms have more than 25% local government connected chairmen. The table indicates that chairmen are more likely to have local government connection than CEOs.
Table 10 percentage of local government connected chairman
Frequency Percent Valid Percent Cumulative Percent
.00 96 42.7 42.7 42.7 .07 11 4.9 4.9 47.6 .08 4 1.8 1.8 49.3 .09 4 1.8 1.8 51.1 .10 9 4.0 4.0 55.1 .11 24 10.7 10.7 65.8 .13 6 2.67 2.67 68.4 .14 7 3.1 3.1 71.6 .15 5 2.2 2.2 73.8 .17 4 1.8 1.8 75.6 .18 4 1.8 1.8 77.3
41 .19 1 .4 .4 77.8 .20 3 1.3 1.3 79.1 .22 14 6.2 6.2 85.3 .23 1 .4 .4 85.8 .27 1 .4 .4 86.2 .29 7 3.1 3.1 89.3 .30 1 .4 .4 89.8 .31 1 .4 .4 90.2 .33 5 2.2 2.2 92.4 .36 8 3.6 3.6 96.0 .40 2 .9 .9 96.9 .44 6 2.7 2.7 99.6 .50 1 .4 .4 100.0 Total 225 100.0 100.0 5.
The table shows the distribution of the percentage of central government connection among the high-rank executives. Compare to the percentage of local government connection, the percentage of central government connection is lower. Only 52% of the firms have central government connection. This value is very close to the percentage of the chairmen’s central government (48%). 40% percent of the firm have not more than 10% high-rank executives with central connection. However, the maximum value is only 24%. This distribution pattern is similar to the distribution of local government connection since a large part of firms have low percentage of government connection. But the percentage of central government connection is more centralized on lower value and the maximum value of the percentage of central government connection is lower. We can also conclude that the high-rank executives are more likely obtain local government connection.
Table 11 percentage of central government connected CEO or chairman
Frequency Percent Valid Percent Cumulative Percent
.00 108 48.0 48.0 48.0
.03 3 1.3 1.3 49.3
42 .05 16 7.1 7.1 60.9 .06 16 7.1 7.1 68.0 .07 17 7.6 7.6 75.6 .08 14 6.2 6.2 81.8 .09 9 4.0 4.0 85.8 .10 6 2.7 2.7 88.4 .11 4 1.8 1.8 90.2 .12 4 1.8 1.8 92.0 .13 3 1.3 1.3 93.3 .14 2 .9 .9 94.2 .15 4 1.8 1.8 96.0 .16 3 1.3 1.3 97.3 .17 3 1.3 1.3 98.7 .18 1 .4 .4 99.1 .20 1 .4 .4 99.6 .24 1 .4 .4 100.0 Total 225 100.0 100.0 6.
The table shows the distribution of the percentage of local government connection among the high-rank executives. In the table, we find that more than 75% of high-rank executives have local government connection. This value is higher than the percentage of chairman or CEO. However, the results are more concentrated between 0% and 17%. Only about 10% of the firms show a rate of higher than 20%. This result implies that most of the firms have local government connection, but among these firms, a large part of them are with very low percentage.
Table 12 percentage of local government connected CEO or chairman
Frequency Percent Valid Percent Cumulative Percent
.00 77 34.2 34.2 34.2
.03 2 .9 .9 35.1
.04 5 2.2 2.2 37.3
.05 10 4.4 4.4 41.8
43 .07 17 7.6 7.6 58.7 .08 12 5.3 5.3 64.0 .09 15 6.7 6.7 70.7 .10 3 1.3 1.3 72.0 .11 10 4.4 4.4 76.4 .12 2 .9 .9 77.3 .13 1 .4 .4 77.8 .14 6 2.6 2.6 80.4 .15 3 1.3 1.3 81.8 .16 2 .9 .9 82.7 .17 5 2.2 2.2 84.9 .18 5 2.2 2.2 87.1 .19 1 .4 .4 87.6 .20 4 1.8 1.8 89.3 .21 4 1.8 1.8 91.1 .22 2 .9 .9 92.0 .23 1 .4 .4 92.4 .24 2 .9 .9 93.3 .25 5 2.2 2.2 95.6 .28 3 1.3 1.3 96.9 .31 1 .4 .4 97.3 .32 2 .9 .9 98.2 .33 3 1.3 1.3 99.6 .35 1 .4 .4 100.0 Total 225 100.0 100.0 6.1.5 State ownership
Table 13 and Figure 4 shows the distribution of state ownership. In our sample, 172 firms out of 225 firms (76.4%) do not have state ownership. This is contradictive to the high percentage of high-rank executives’ government connection. This result indicates that in most non-state ownership firms, high-rank executives are government connected. The result also shows that only about 10% of the firms have more than
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30% of state ownership, which means that not more than 10% of the firms in our sample control by government. We therefore conclude that most of the firms in our sample do not have state ownership, but the high-rank executives are mostly government connected.
Table 13 state-ownership
Frequency Percent Valid Percent Cumulative Percent
0 172 76.4 76.4 76.4 0-0.1 15 6.7 6.7 83.1 0.1-0.2 6 2.7 2.7 85.8 0.2-0.3 11 4.9 4.9 90.7 0.3-0.4 6 2.7 2.7 93.3 0.4-0.5 7 3.1 3.1 96.4 0.5-0.6 3 1.3 1.3 97.8 0.6-0.7 1 .4 .4 98.2 0.7-0.8 1 .4 .4 98.7 0.8-0.9 3 1.3 1.3 100.0 Total 225 100.0 100.0 Figure 4
