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Political Connections and Stock Liquidity: Political Network, Hierarchy and Intervention

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Abstract

I measure the value of political connections through their liquidity effect on privately controlled firms and state-owned enterprises (SOEs) in China’s stock market over the period of 2003 to 2012. State participation among the top ten shareholders is used as a criterion for classifying a firm as “politically connected”. Using this criterion, I find that politically connected firms are associated with higher liquidity, which is manifested by tighter spreads, higher quoted depths, greater trading activity, lower adverse selection spread components and a smaller price impact. I further examine the effects of three dimensions of political connections on liquidity: political network, hierarchy and intervention. First, I determine that a greater political network results in greater liquidity for both state-owned and privately controlled firms. Second, SOEs that are centrally controlled possess higher liquidity than those that are locally controlled. Third, greater political intervention arising from direct government control impedes the positive impact of political connections on liquidity.

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  • Ding, Mingfa, 2014. "Political Connections and Stock Liquidity: Political Network, Hierarchy and Intervention," Knut Wicksell Working Paper Series 2014/7, Lund University, Knut Wicksell Centre for Financial Studies.
    • Handle: RePEc:hhs:luwick:2014_007
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    More about this item

    Keywords

    Political connections; Firm liquidity; Corporate governance; Firm value; Information asymmetries; Trading activity;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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